Swisswatches ISPA

See discussions, stats, and author profiles for this publication at: https://www.researchgate.
net/publication/304037801
When corporatism leads to corporate governance failure: the case of the Swiss
watch industry
Book · June 2016
CITATIONS READS
5 7,539
2 authors:
Philipp Aerni Isabelle Schluep Campo

Center for Corporate Responsibility and Sustainability (CCRS) University of Zurich
137 PUBLICATIONS 1,199 CITATIONS 28 PUBLICATIONS 77 CITATIONS
SEE PROFILE SEE PROFILE
Some of the authors of this publication are also working on these related projects:
Local Embeddedness of Multinational Enterprises in Developing Countries and their Sustainability Effects View project
Key Embeddedness Indicator (KEI) online-platform to determine a company's contribution to the Sustainable Development Goal 8 View project
All content following this page was uploaded by Philipp Aerni on 17 June 2016.
The user has requested enhancement of the downloaded file.

Aerni Watches_v5:Layout 1 10/06/2016 18:14 Page i
When corporatism
leads to
corporate
governance failure
The case of the

Swiss watch industry
Isabelle Schluep Campo

&
Philipp Aerni
Aerni Watches_v5:Layout 1 10/06/2016 18:14 Page ii
Aerni Watches_v5:Layout 1 10/06/2016 18:14 Page 1
When corporatism
leads to
corporate
governance failure
The case of the

Swiss watch industry
Isabelle Schluep Campo

&
Philipp Aerni
When corporatism leads to corporate governance failure

The case of the Swiss watch industry
Dr Isabelle Schluep Campo, Head of Sustainable Impact, Center for

Corporate Responsibility and Sustainability (CCRS) at the University of
Zurich, Zähringerstrasse 24, 8001 Zurich, Switzerland; tel. +41 44 634 40 20;
email isabelle.schluep@ccrs.uzh.ch
Dr Philipp Aerni, Director of the Center for Corporate Responsibility

and Sustainability (CCRS) at the University of Zurich, Zähringerstrasse 24,
8001 Zurich, Switzerland; tel. +41 44 634 40 60; email philipp.aerni@uzh.ch
© Isabelle Schluep Campo and Philipp Aerni 2016
ISBN: 978-0-9932932-6-9
Citation: Schluep Campo, I. and Aerni, P. 2016. When corporatism leads to

corporate governance failure: the case of the Swiss watch industry. Banson,
Cambridge, UK.
Available online: www.ourplanet.com
Published by Banson, Cambridge, UK.
Printed in the UK by Cambridge Printers

Contents
Summary 6
Acknowledgements 8
Acronyms and abbreviations 9
1 Introduction 11
2. Historical background 15
2.1 The Foundation of ASUAG 16
2.2 The 1951 “Watch Statute” 18
2.3 Post World War II economic expansion and the 1961 Watch Statute 19
3. Corporatism in Switzerland 21
3.1 Corporatism embodied in the “Swiss made” label for watches 23
4. The crisis of the Swiss watch industry in the 1970s 27

4.1 Swiss technology commercialized elsewhere 28
4.2 The role of the Swiss banks 29
4.2.1 SSIH before the merger 29
4.2.2 ASUAG before the merger 31
5. A merger of unequals: SSIH and ASUAG become SMH 37

5.1 How a former state monopoly became a private monopoly 43
5.2 Pretending to be Robin Hood while representing the establishment 48
5.2.1 Nicolas G. Hayek 49
5.2.2 Smart Car 52
5.2.3 Car batteries 53
5.2.4 Innovation rhetoric 54
5.2.5 Regulation and securing ownership 56
3
The Swiss watch industry
6. The position of the Swiss watch industry in the global market 59

6.1 The Swiss watch industry at its peak in 2014 61
6.2 Export crisis of the Swiss watch industry in 2015 62
6.3 Challenges facing the watch industry 65
6.3.1 The rise of smartwatches and wearables 65
6.3.2 The Apple Watch 67
6.3.3 Inventory problems and short selling 68
6.3.4 Pending lawsuit 69
6.4 Strenghtening “Swissness” rules, the usual corporatist response 70
7. Market and political power of Swatch Group 72

7.1 Market power of Swatch Group 72
7.1.1 Swatch Group market power in production and distribution 73
7.1.2 Monopoly of Swatch Group in different markets of the watch
industry 74
7.1.3 WEKO’s decision regarding Swatch Group’s market power 77
8. The revision of the “Swiss made” regulation 83

8.1 The revision of the “Swiss made” regulation for watches 83
8.2 The role of the Federation of the Swiss Watch Industry
(FH) in the design of new “Swiss made” regulation for watches 86
8.3 Impacts of the new “Swiss made” regulation for watches 87
9. The Swatch Group: high on reputation, low on

corporate governance 90
9.1. Corporate governance problems 90
9.2. What Swatch Group and Volkswagen may have in common 92
10. Conclusions 95
4
Contents
BOXES
1 Economic articles in the Swiss constitution 19
2 1971 requirements for the “Swiss made” label for watches 25
3 Delirium and Swatch 34
4 How the ASUAG-SSIH merger was portrayed officially 45
5 The prestige value of mechanical watches 61
6 WEKO’s decision in light of the Cartel Act 81
7 The complex and costly new “Swiss made” label for watches 85
8 The position of the Swatch Group within FH 87
ANNEX OF FIGURES 106

1 Share of Swiss watch production in global output of
watches and movements 106
2 Number of workers and manufacturers in the Swiss
watch industry 107
3 Exports of Swiss finished watches and movement
blanks, 1944–1982 108
4 Exports of Swiss clocks and watches and parts, 1988–2015 109
5 Imports of clocks and watches and parts by Switzerland,
1988–2015 110
6 Leading companies in the watch market, 2014 111
7 Development of inventories, Swatch Group, 1999–2015 112
8 Organization of ASUAG, 1982 113
9 Swatch Group net sales and profits, 1983–2012 114
10 Companies of the Swatch Group 115
11 ASUAG in numbers, 1973–1982 116
12 SSIH in numbers, 1971–1982 117
13 Unemployment rate in the Swiss watch industry, 2008–2016 118
5
Summary
orporatism is often seen as the way Swiss stakeholders in business
C and politics handle industrial challenges in a reasonable and flexible

way. The following publication argues, however, that the emergence
of corporatist structures in the Swiss watch industry has often encouraged
rent-seeking and collusion at the expense of the creation of new markets
through innovation. This legacy makes it currently difficult for the industry to
effectively respond to new technological challenges and changing societal
preferences in the global watch business.
The report draws on archival sources, accessible since 2015, that were also
extensively discussed in the Swiss print media in early 2016. They provide
increasing evidence of corporate governance failure in the 1983 merger of
SSIH (Société suisse pour l’industrie horlogère) and ASUAG (Allgemeine
Schweizerische Uhrenindustrie AG) that led to today’s Swatch Group. The
merger, induced by Swiss banks, was portrayed as a necessary step to save
the two allegedly bankrupt watch companies. Yet, the archival sources show
that ASUAG had already been successfully restructured and was ready to
conquer global markets with its new product, the Swatch.
Through a forced merger of unequals, the banks were able to avoid heavy losses
that would have resulted from the bankruptcy of the ailing SSIH. The merger
essentially enabled the conversion of a former state monopoly, called ASUAG,
into an even stronger private monopoly, eventually called the Swatch Group.
The Swatch Group was able to establish itself as the leading watch company
in the world by benefiting from prior innovation and corporate restructuring. In
addition, the company built up its market power through extensive brand and
“Swissness” marketing, political lobbying designed to preserve its monopoly
6
Summary
pricing power in the production of certain watch parts, and the rhetoric of
innovation to keep shareholders in good hope.
The new “Swiss made” regulation for watches, to be enforced by 2017, as well
as weak anti-trust legislation and a permissive political culture towards popular
“Swiss made” monopolies reflect a new type of corporatism that leads to
corporate governance failure. Urgent policy reforms are required to revitalize
the Swiss watch industry through entrepreneurial outsiders who are able to
challenge complacent insiders and respond to the global rise of the smartwatch
with bold innovation rather than defensive regulation.
7
Acknowledgements
We would like to thank Amy K. Glasmeier, professor of Economic Geography

and Regional Planning at MIT, for giving us the initial impulse to pursue a
study on the recent history of the Swiss watch industry. She visited the Center
for Corporate Responsibility and Sustainability (CCRS) at the University of
Zurich in September 2015 to give a keynote lecture at the CCRS conference
on “Sustainable Urban Growth”. After the conference, CCRS organized a
three-day tour to jointly meet with several representatives from the watch
industry and officials from the canton of Solothurn.
Her interest in the Swiss watch industry originates from the field work she
did for her book titled “Manufacturing Time – Global Competition in the Watch
Industry, 1795–2000” which she had published in the year 2000. We are very
thankful for all the inspiring conversations we had with Amy and all the
insights she shared with us. In addition, we would like to thank the numerous
Swiss stakeholders who shared their insights with us on the Swiss watch
industry, in particular Elmar Mock, Kenji Izumi, Paul Wyser, Rolf Rothacher,
Bruno Bohlhalter and Dirk Schröder.
This study has not received any external funding.
Zurich, June 9, 2016,

Isabelle Schluep Campo and Philipp Aerni
8
Acronyms and abbreviations
ASUAG Allgemeine Schweizerische Uhrenindustrie Aktiengesellschaft /

General Swiss Watch Corporation
BBL Bundesblatt / Federal Gazette
CEH Centre Electronique Horloger
CEAHR Confédération Européenne des Associations d’Horlogers
Réparateurs (European Confederation of Watch and Clock
Repairer’s Assocations)
EBITA Earnings before interest, taxes, and amortization
EFTA European Free Trade Association
ETA SA Elegance, Technology, Accuracy, originally called Ébauches SA
FH Fédération de l'industrie horlogère suisse / Federation of the
Swiss Watch Industry
FINMA Finanzmarktaufsicht / Swiss Federal Banking Commission
GATT General Agreement on Tariffs and Trade
GWC General Watch Co. Ltd.
IFRS International Financial Reporting Standard
IGE Institut für geistiges Eigentum / Swiss Federal Institute for
Intellectual Property Rights
PR Public Relations
R&D Research and Development
SBV / Schweizerischer Bankverein /
SBC Swiss Banking Corporation
SIEC Significant Impediment to Effective Competition
SMH Société de Microélectronique et d'Horlogerie / Swiss Corporation
for Microelectronics and Watchmaking Industries
SMI Swiss Market Index
SR Systematische Rechtssammlung / Classified compilation of
federal laws
9
SSIH Société suisse pour l’industrie horlogère / Swiss Watch Industry

Corporation
SWA Schweizerisches Wirtschaftsarchiv / Swiss Economic Archive
UBAH Union des branches annexes de l’horlogerie / Union of
Associated Watchmaking Activities
SBG / Schweizerische Bankgesellschaft /
UBS Union Bank of Switzerland
STEA Steuerungsausschuss / Interim Steering Committee of ASUAG in
1982
WEKO Wettbewerbskommission / Swiss Federal Competition
Commission
WTO World Trade Organization
10
Chapter 1
Introduction
he history of the Swiss watch industry in the 20th century was shaped by
T the spirit of Swiss corporatism. Whenever the industry faced crises, the
Swiss government sat together with the powerful stakeholders of the watch
industry to come up with policy measures designed to reconcile industrial interests
with the public interest. As a consequence, the watch industry was regulated and
supported by the state in a way that protected Swiss production and employment
in the short term but caused challenges in the long term that could not be
addressed through government intervention alone.
While the government gradually withdrew its stake in the watch industry after World
War II, the crisis of the watch industry in the 1970s forced not just the state but
also Swiss banks, which ended up being the de-facto owners of the industry in the
late 1970s, to take action. They eventually decided to merge the two largest Swiss
watch companies, SSIH and ASUAG1, into one company in 1983. This was then
widely celebrated as the necessary measure to restructure the industry in a way
that would restore its global competitiveness.
Yet, archival sources at the Swiss Economic Archive at the University of Basel,
accessible since 2015, reveal some major irregularities in the transactions that
led to the ASUAG-SSIH merger2. The archival material documents the period
between 1968 and 1984 with a special focus on the history of ASUAG. It reveals
that ASUAG may have faced some short-term losses in the early 1980s due to
external factors. But, unlike SSIH, ASUAG had been well re-structured and was
1. SSIH stands for Swiss Watch Industry Corporation (Société suisse pour l’industrie
horlogère) and ASUAG for General Swiss Watch Corporation (Allgemeine Schweizerische
Uhrenindustrie Aktiengesellschaft).
2. The archive reference number is: CH SWA PA 532.
11
widely recognized as the innovation leader in watch manufacturing and

technology. Yet, admitting that it was a merger of unequals was not in the interest
of the Union Bank of Switzerland (UBS), which had previously invested millions
in the ineffective restructuring of SSIH and could not afford to let it go bankrupt
without losing face. UBS and the Swiss Bank Corporation (SBC) led a
consortium of Swiss banks that provided the necessary funds to enable the
merger and endow it with new capital. Since the bank consortium never had the
intention to run the ASUAG-SSIH merger itself, they accepted the proposal of
UBS Banker and former chairman of the governing board of SSIH, Peter Gross,
to assist Nicolas Hayek in his efforts to acquire a 51 per cent share and obtain
the majority of voting rights of the merged company that by then was called
SMH3. Nicolas Hayek was able to realize this option in September 1985 thanks
to the support of a pool of investors who agreed to let him have the sole voting
right for the pool4. SMH was renamed Swatch Group in 1998 with the Hayek
family as its de-facto owner.
Documenting the historical background of the watch industry since the end of World
War I is important in order to understand how such a merger was able to convert
ASUAG, which used to be essentially a state monopoly, into a private monopoly,
owned primarily by the Hayek family.
Understanding the history of corporatism in the Swiss watch industry is also

important in order to make sense of the responses of the Federation of the Swiss
Watch Industry (Fédération de l’industrie horlogère suisse, FH) and the Swiss
government to the current global economic and technological challenges. These
challenges are mainly linked to the economic slowdown of China and the rise of
the smartwatch. Instead of exposing companies to more international competition,
3. ASUAG-SSIH was renamed SMH in 1984 and stands for Swiss Corporation for
Microelectronics and Watchmaking Industries (Société de Microélectronique et d'Horlogerie).
4. Graden, Tobias, 2016, Wie Nicolas G. Hayek zur Swatch Group kam. Bieler Tagblatt,
04.03.2016.
12
Introduction
FH has successfully lobbied with the government to pass the new “Swiss made”
regulation for watches. The regulation raises the local content requirements from
50 per cent to 60 per cent in order to protect the Swiss brand and keep jobs in
Switzerland. However, in view of the growing vertical integration of the big Swiss
watch companies, the costly and complex regulation is likely to further reduce
domestic competition at the expense of global competitiveness5.
Since the early 1970s, watch companies must comply with strict criteria to obtain
the “Swiss made” label. Yet, the “Swiss made” regulation for watches approved
by the Federal Council in September 2015 goes far beyond the generally
accepted criteria and is likely to be incompatible with certain bilateral trade
agreements as well as the principles of the World Trade Organization (WTO)6.
Despite its costliness and complexity, it does not enhance the effectiveness
of the protection of the Swiss brand from counterfeit products abroad. It
rather represents a traditional Swiss corporatist response to emerging global
challenges through regulation rather than innovation. However, while the
protection and support of the Swiss watch industry was previously based on a
deal behind closed doors, the new protectionism is publicly announced as a
patriotic step to protect the value of “Swiss made” products in agriculture and
industry. The belief that Swiss watches, especially in the higher price segments,
will always fetch a high premium, independent of the economic and technological
changes, highlights the dangers of Swiss complacency. In this publication, we
argue that this complacency has a lot to do with a lack of public understanding
of the history of the Swiss watch industry and how corporatist responses tended
to prevent rather than enable the reinvention of the industry.
5. Schaible, Franz, 2015, “Swissness benachteiligt Konsumenten”. Interview mit Ronnie

Bernheim. Schweiz am Sonntag 5. September 2015 (available online: http://www.
aargauerzeitung.ch/wirtschaft/swissness-benachteiligt-konsumenten-129519839).
6. Aerni, Philipp, 2015, Stellungnahme zur Revision der Verordnung über die Benützung
des Schweizer Namens für Uhren. Brief vom 2. Dezember 2015 an das Schweizerische
Institut für Geistiges Eigentum, Bern.
13
The book is structured as follows: the historical background of the Swiss watch
industry since the end of the World War I is discussed in Chapter 2. It illustrates
how corporatism shaped the structure of the industry and how government
interventions shaped the structure of the watch market over time. Corporatism in
Switzerland will then be discussed in the context of the watch industry in Chapter
3. In Chapter 4, we elucidate the corporatist response during the crisis of the watch
industry in the 1970s. Chapter 5 examines the official portrayal of the merger of
SSIH and ASUAG in 1983 and compares it with the facts found in the sources of
the Swiss Economic Archive of the University of Basel. Chapter 6 explores the
position of the Swiss watch industry in the global market and the challenges it is
currently facing. Chapter 7 documents how the market and political power of the
Swatch Group, the world’s largest watch company (in terms of sales value), has
continuously increased. Chapter 8 discusses the recently approved “Swiss made”
regulation for watches. The chapter also discusses how this will impair the ability of
the Swiss watch industry to respond to disruptive technology, such as the
smartwatch. Chapter 9 discusses corporate governance problems of the Swatch
Group and what Swatch Group and the car-maker Volkswagen have in common.
The paper ends with conclusions and outlook in Chapter 10.
14
Chapter 2
1
Historical background
he watch industry has always been very sensitive to global economic
T trends due to its high dependency on exports. Until World War I, Swiss
watch companies dominated world markets thanks to their reputation
for quality, innovation and precision, but also their ability to respond to
competition challenges from abroad, especially the emerging watch production
system in the United States2. After the war, the industry entered a deep crisis
from which it recovered briefly in the late 1920s only to be hit again by the global
economic recession in the 1930s. In that period, the watch industry was
fragmented and characterized by small-scale businesses that were competing
fiercely, yet lacked the ability to expand in scope and scale. In order to cut costs,
avoid the high import tariffs for finished watches in destination countries
and remain competitive, Swiss watch companies often exported so-called
“chablons”, which were semi-finished movements for final assembly abroad.
This trend was called “chablonnage” and led to undesirable know-how transfer
to foreign competitors. This was considered to be neither in the interest of the
industry nor in the public interest.
In order to suppress the practice of “chablonnage” and to preserve the

industry structure, the watch industry moved towards a cartelistic structure in
the 1920s and 1930s. The different sectors of the industry got organized into
associations: Swiss manufacturers of finished watches came under the
umbrella of the Swiss Watch Industry Federation (Fédération Horlogère FH,
1. Information in this chapter is mostly based on: BBL 1983 III 945. Botschaft über die
Veräusserung der Beteiligung des Bundes am Aktienkapital der Allgemeinen
Schweizerischen Uhrenindustrie AG vom 14. September 1983.
2. Glasmeier, Amy, 1991, Technological discontinuities and flexible production networks:
The case of Switzerland and the world watch industry. Research Policy, Volume 20, Issue
5: 469–485.
15
later called the Fédération de l'Industrie horlogère suisse) in 1924; Firms

producing movement blanks (“ébauches”) became united under Ébauches
SA, founded in 1924; and finally the Union of Associated Watchmaking
Activities (Union des branches annexes de l’horlogerie, UBAH) grouped the
component manufacturers. Through these associations and unions a very
large share of producer firms could be organized.
The three entities adopted a set of conventions to stop the ruinous competition
and to ban “chablonnage” abroad. Measures comprised, for example, minimum
prices and export restrictions. However, these private legal agreements were
not successful in discouraging the practice. As a consequence, people affected
by the decline of the domestic watch industry called for state intervention. In
1931, a petition of 56 000 signatures was handed over to the Swiss Federal
Council with a request to take measures to end “chablonnage” and to remedy
the situation in the watch industry.
2.1 The Foundation of ASUAG

The 1931 petition induced the Swiss government to financially contribute
to the foundation of the ASUAG holding3. ASUAG united Ébauches SA with
most of the remaining independent movement blank producers4 and the
manufacturers of regulating components (spiral spring, escapement and
balance wheel). While the Swiss government provided CHF 6 million to write
3. Bundesbeschluss vom 26. September 1931 über die Unterstützung der Uhrenindustrie
(SR 934.13).
4. In the course of the creation of ASUAG, ETA SA – a subsidiary of Eterna watch
company in Grenchen – had to be sold by the owner, Theodor Schild, so it could be
integrated into ASUAG. In this particular case, the owner was compensated only for half of
the company’s value in cash, for the other half he received shares of the Ébauches SA.
Even though there was a compensation, it was de-facto an expropriation in the name of
the interest of the country. Subsequently, the shareholders of the Ébauches SA were
affected by a second expropriation in 1983 when SSIH merged with ASUAG. History on
the Eterna company is available online: http://www.schild-eterna.de/seite2.htm; personal
communication with the daughter in law of Theodor Schild (2016).
16
down the non-performing assets of ASUAG and an interest-free loan of

CHF 7.5 million, the banks and the watch industry each subscribed to share
capital of CHF 5 million. The emergency law (Notrecht)5 that had been in force
since World War I provided the legal basis for state interventions that were
contrary to the provisions on freedom of trade and industry (Handels- und
Gewerbefreiheit) as established in Art. 31 of the revised Swiss Federal
Constitution from 1874.
In its statutes, ASUAG was obliged to deliver parts, components and movement
blanks to all watch manufacturers in Switzerland6. Another purpose of ASUAG
was to retain control over key technologies by prohibiting exports such as
templates, components, watch-manufacturing and assembly technologies
and tools to other countries. This aim was certainly different from a profit-
oriented shareholder company. However, the concentration process was meant
to help achieve economies of scale and to ensure the predictable supply of
components to Swiss watchmaking companies.
One year earlier, the merger of the Omega and Tissot brands in 1930 resulted
in the creation of SSIH (Société suisse pour l’industrie horlogère). While SSIH
concentrated on the production of finished watches, ASUAG focused on
movements and other watch parts. For the next five decades, SSIH and ASUAG
remained the two largest companies in the Swiss watch industry and they
continuously grew in size.
The strategy of consolidation was insofar promising as it partly eliminated

competition within Switzerland and ensured that smaller companies could
5. During severe crises such as World War I & II or the economic depression of the 1930s
extraconstitutional federal emergency law was applied that gave the Federal Council powers
that normally only the Parliament was entitled to exercise.
6. From the outset, ASUAG controlled four groups: Ébauches SA, Fabriques d’Assortiments
réunies SA, Fabriques de Balanciers réunis SA, Société des fabriques de spiraux réunis SA.
17
survive as subsidiaries and suppliers of SSIH and ASUAG. However, the

regulation was incomplete. ASUAG did not control all movement blank and
regulating component producers since preventing new companies from
entering the sector was not possible. It took direct governmental intervention
in 1934 designed to demand export permits for movement blanks, watch parts
and kits as additional barriers to market entry.
By doing so, the government gave legal backing to the 1928 watch industry
conventions and made dissidents comply. In 1936, government control
tightened even more by enforcing minimum prices fixed by the 1928
conventions on the dissidents, and by regulating home-based work.
2.2 The 1951 “Watch Statute”

In 1937, the Swiss government integrated the different interventionist
measures in the watch industry into a single state decree designed to protect
the Swiss watch industry. The decree became untenable after World War II
when the new economic articles in the Swiss Federal Constitution (Box 1) were
approved in a national referendum in 1947. These articles were designed,
among other things, to enhance economic freedom in trade and industry. In
view of its cartelistic structure, the public-legal order of the watch industry
was not compatible with this objective. Yet, the structure was eventually
preserved by the so-called “Watch Statute” (statut légal de l'horlogerie), which
was approved in a national referendum in 1951. It essentially legalized the
state-controlled monopoly on movements and assortments that governed the
watch industry from the 1930s to the 1960s. According to Katzenstein (1984)
the statute “prolonged government supervision of this cartelized industry”
for ten years and “was intended to preserve decentralization in the face of
economic change”7. The statute further benefited the so-called “watch
7. Katzenstein, Peter J., 1984, Corporatism and Change, Austria, Switzerland, and the
Politics of Industry. Ithaca, N.Y.: Cornell University Press. p. 218.
18
Box 1 Economic articles in the Swiss constitution

The Swiss emergency law dating back to World War I restricted
economic freedom and led to the formation of cartels and monopolies.
Eventually, this led to the national referendum on the economic articles
(Wirtschaftsartikel) approved in 1947. The economic articles broadly
regulated the relationship between the government and the economy
(economic policy). The freedom of trade and industry was re-established
and anti-trust provisions introduced. Social policy measures had to
be compatible with the freedom of trade and industry. However,
the economic articles also introduced corporatist elements into the
constitution such as the involvement of associations in the preparation
of legal projects and their implementation and the possibility for generally
binding sectorial employment agreements.
Source: Wirtschaftsartikel, Historisches Lexikon der Schweiz (available online:
http://www.hls-dhs-dss.ch/textes/d/D13805.php).
barons” because it allowed them to extract rents resulting from fixed sales
prices for parts, and to benefit from high barriers to market entry. Yet, the
companies producing the finished watches were increasingly exposed to
international competition.
2.3 Post World War II economic expansion and the 1961 Watch Statute
After World War II, the Swiss watch industry expanded considerably due to the
strong worldwide economic recovery. Industrial expansion in the 1950s and
1960s was also fuelled by efforts to liberalize international trade. Tariff
reductions within the GATT (General Agreement on Tariffs and Trade), the
elimination of tariffs on watch products among members of EFTA (European
Free Trade Association) in 1966, and the end of Swiss export restrictions in
1965 on shipments of components to US producers contributed to the increase
19
in export sales of Swiss watches without the need to abandon the cartelistic
structure of the industry8.
The production volume of time pieces and movement blanks in Switzerland

peaked in 1974, but the Swiss share in the total world production volume had
already started to decline in the 1950s due to increased production capacities
outside Switzerland. By 1982, the Swiss share in global world production
eventually shrunk to only 9.3 per cent, compared to 60 per cent in 1949 (see Figure
1 in Annex).
Early steps of trade liberalization also induced the Swiss government to

shift its industrial policy focus from preserving jobs in the Swiss watch
industry and preventing “chablonnage” towards improving the industry’s
international competitiveness.
The “Watch Statute” of 1961 introduced a transitional regime designed to

gradually remove measures that prevented competition. The export licensing
system was eased considerably (with the exception of the exports of movement
parts and blanks) and a quality control system was introduced to foster
competition and to avoid the export of qualitatively bad watches that could
threaten the reputation of the Swiss watch. Another purpose of the quality
control system was to keep barriers to market entry high, once the permit
system for the establishment of new companies in the watch industry was
abandoned in 19669.
9. BBI 1969 II, 1489. Botschaft des Bundesrates zum Entwurf eines Bundesbeschlusses
über die offizielle Qualitätskontrolle in der schweizerischen Uhrenindustrie und die
Ergänzung des Markenschutzgesetzes vom 2. September 1970.
20
Chapter 3
Corporatism in Switzerland
efore discussing the causes of the global economic crisis of the 1970s
B and its consequences for the Swiss watch industry, we need to

understand the model of corporatism that emerged in Switzerland after
the end of World War I, and how it evolved in the Swiss watch industry.
Katzenstein defines “democratic corporatism” in Switzerland, Germany and

Austria as an “interest-group system that is characterized by a voluntary
and informal coordination of conflicting objectives through continuous
political bargaining among interest groups, state bureaucracies, and political
parties”1. However, unlike for Germany and Austria, where trade unions play
a crucial role in corporatism, he considers Swiss corporatism to be more
liberal. Klaus Armingeon believes that this liberal corporatism has nevertheless
resulted in favourable social outcomes such as the expansion of the welfare
state, low unemployment rates and stable prices during the cold war period
in Switzerland. Moreover, since the institutional setting in which political
bargaining takes place in Switzerland offers many opportunities to block
reforms that might negatively affect a powerful stakeholder, Swiss corporatism
has proved to be remarkably stable, despite rather weak trade unions, the
pressure for deregulation after the Cold War and the shrinking loyalty of voters
and employees to particular political parties and economic organizations2.
Sciarini challenges this view, however, by arguing that corporatism has
become increasingly mediatized, forcing policy makers to increasingly
compete over media attention to attract public support for their political
2. Armingeon, Klaus, 1997, Swiss corporatism in comparative perspective. Western
European Politics 20(2). p. 164–179.
21
agenda – often at the expense of the consensus-oriented pre-parliamentary

phase of political decision making3.
Most prior publications tend to praise Swiss corporatism for its orderly and quite
reasonable handling of difficult industrial transitions, joint responses to new
needs in vocational training and skill development, and the facilitation of social
partnership. Joint collective action in the public interest is indeed praiseworthy.
However, corporatist decision making in affluent countries such as Switzerland
can also be problematic, especially when it concerns industrial and agricultural
policy. In such political arenas the involved stakeholders are often focused on
defending their stake in a changing economic and technological environment –
framing foreign competition as a threat to national interests. As such, they claim
to speak on behalf of the public interest by arguing that they aim to protect
Swiss quality standards, keep jobs in Switzerland through domestic cooperation
and to shield people from potential risks associated with change through foreign
competition. They, however, tend to conceal their private interest to maintain
the status quo and secure access to scarce public resources4. In other words,
fear of change is portrayed as a moral concern, benefiting insiders at the
expense of outsiders5.
The history of the watch industry illustrates this well. The Swiss watch industry
faced increasing competition from abroad and economic decline at home
in the 1930s. As a result, interventionist policies were put in place to protect
domestic industry from foreign competition. Such measures defied the Swiss
3. Sciarini, Pascal et al., 2015, Political decision making in Switzerland: The consensus
model under pressure. Palgrave Macmillan.
4. Aerni, Philipp et al., 2009, Nostalgia Versus Pragmatism? How Attitudes and Interests
Shape the Term Sustainable Agriculture in Switzerland and New Zealand, Food Policy
34(2): 227–235.
5. Aerni, Philipp, 2011, Die Moralisierung der Politik als Kehrseite der Angst vor dem
globalen Wandel. In: Philipp Aerni und Klaus-Jürgen Grün (Hrsg), Moral und Angst.
Vandenhoeck und Ruprecht Verlag, Göttingen: 13–32.
22
constitutional rights of freedom of trade and industry and led to the cartelization
of the watch industry – enhancing the risk of corporate governance failure.
Even though corporatism back then is different from corporatism today, most
types of corporatism in economic policy end in the same unintended long-
term consequences: namely, protecting rent-seeking insiders from innovation-
seeking outsiders. Corporatism may thus protect the public interest in the short
term (e.g. preserving jobs) but undermine industrial competitiveness and the
capacity to innovate in the long term.
3.1 Corporatism embodied in the “Swiss made” label for watches

In the post-World War II era, the Swiss watch industry was in a position of
market dominance (Figure 1). Trade liberalization, the introduction of automation
and rationalization processes, especially by American and Japanese watch-
makers, and the quartz revolution led to fundamental changes on the supply
side of the Swiss watchmaking industry. Especially the quartz revolution initiated
the transition from the mechanical to the electronic age in watchmaking. It
unleashed disruptive forces that could only be mastered by reorganizing the
entire industry and investing in a new labour force with new skills.
In view of the looming challenges, the “Watch Statute” was abandoned in 1971
and all remaining interventionist measures were removed. Instead, the “Swiss
made” label for watches (Box 2), based on Swiss trademark law, was introduced
to strengthen the existing quality control system of Swiss watch manufacturing.
The government justified this measure not only with the economic importance
of the watch sector but also the national interest. Even though the value of watch
exports amounted to only half the value generated by export sales in machinery
or the chemical industry, Swiss watches, and what they stood for abroad, were
deemed to be of particular national public interest. As cherished consumer
goods, watches were sold worldwide and reached millions of people. Since they
were well-suited to promote the quality and reliability of Swiss products abroad,
23
international sales and marketing of Swiss watches were expected to have

positive spillovers for the reputation of other Swiss export products. The Swiss
bar association argued for example that the good reputation of the Swiss watch
must be considered as a common property and that its preservation therefore
was of national interest6. The geographical indication for Swiss watches as well
as the quality control system were found to be compatible with the freedom of
trade and industry provisions in the Swiss constitution. The legal measures
stemming from the trademark law were complemented by the quality control
system designed to prevent the misuse of the “Swiss made” label7.
The consensus on the importance of the “Swiss made” label laid the ground
for a new type of corporatism that had the objective to promote the reputation
of Swiss products abroad – in the public interest. For that purpose, industry
bodies (in analogy to former organizations of craftsmen, such as guild
systems) first set the rules that apply to their members (and that restrict
membership), and second, claim to act in the public interest8, for example by
claiming to preserve jobs in Switzerland.
The local content requirements of the “Swiss made” regulation plus strict
quality control helped to ensure that ASUAG kept its monopoly9 in the area
of movement blanks and watch parts. The same applied to SSIH for finished
watches. This addition to the Swiss trademark law was criticized at that time
6. BBl 1970 II 697. Botschaft des Bundesrates an die Bundesversammlung über die
offizielle Qualitätskontrolle in der schweizerischen Uhrenindustrie und die Ergänzung des
Markenschutzgesetzes. p. 698.
7. BBI 1969 II, 1489. Botschaft des Bundesrates zum Entwurf eines Bundesbeschlusses
über die offizielle Qualitätskontrolle in der schweizerischen Uhrenindustrie und die
Ergänzung des Markenschutzgesetzes vom 2. September 1970.
8. Sauter, Wolf, 2015, Containing corporatism: EU competition law and private interest
government, TILEC Discussion Paper, DP 2015-001. p. 2.
9. Schweizerische Studiengruppe für Konsumentenfragen, 1971, Neuartiger
Interventionismus, Unter dem Banner der Qualitätsförderung – Für Uhren ersetzt der
Bundesrat den Marktmechanismus, Der Bund, Bern, 3. Februar.
24
Box 2 1971 requirements for the “Swiss made” label for watches
A watch that carries the “Swiss made” label has to fulfill the following
requirements: the movement of the watch has to be Swiss; the movement
of the watch is encased in Switzerland and the final inspection by the
manufacturer is carried out on Swiss grounds. A watch movement is
considered to be Swiss if it is assembled in Switzerland, inspected by
the manufacturer in Switzerland, and at least 50 per cent of the total value
of the components is manufactured in Switzerland, without taking into
account the cost of assembly. There is no provision on the total value of
the watch that has to be of Swiss origin. No other sector of the Swiss
economy enjoyed such legislation at that time.
Source: SR 232.119. Verordnung über die Benützung des Schweizer Namens für
Uhren (available online: https://www.admin.ch/opc/de/classified-compilation/
19710361/199505010000/232.119.pdf).
in the press because it gives the Federal Council general powers to prescribe
quality standards for any industry or any product on behalf of protecting the
general interest of the Swiss economy. It was further argued that “not the
indication of the country of origin but the creation, promotion and care of
watch brands is decisive for the success of the industry as demonstrated by
the competitors from the USA and Japan”. Further, increased competition
from abroad was not seen as a threat for the quality of watches. In fact, the
quality of watches from Japanese and US companies was often seen as
superior because of more advanced production technologies10.
According to Katzenstein11, the new regulation therefore “[…] worked to the

disadvantage of a sizeable low-cost segment of the Swiss watch industry,
10. Ibid.
25
which produced just under one-half of the total volume (about 15 per cent
of the value) of watch exports in 1969. These producers were attracted to
foreign sourcing of components and foreign production; they were intent on
meeting Japanese and American competition in this cost-efficient segment
of world markets”12.
Politics of Industry. Ithaca, N.Y.: Cornell University Press. p. 220–221.
26
Chapter 4
The crisis of the Swiss watch
industry in the 1970s
n the 1970s, the post-war global economic boom came to an end. The collapse
I of the Bretton Woods System1 in 1971 led to a strong appreciation of the

Swiss franc while productivity in the Swiss watch industry was comparatively
low. Finally, the energy crisis and Switzerland’s strong dependence on fuel
imports led to higher variable production costs. As a result, the average price
of a Swiss watch in the dollar zone was about 180 per cent2 higher in 1978 than
in 1971. All these trends were not conducive to facing the growing competition
from newly industrialized countries in Asia as well as the United States.
The Japanese developed modern assembly line systems that enabled them
to automate large parts of the production of mechanical watches. As a
consequence, they were able to produce at much lower cost, with a smaller
workforce and in a quality and precision that challenged the Swiss quality label.
Moreover, their watches were much lighter than similarly priced Swiss watches
with their pin-pallet escapement invented by Georges Frédéric Roskopf in the
19th century. Roskopf’s technology had dominated the low-end price segment
of watches for decades. Customers increasingly turned their back on these
low-end mechanical Swiss watches, and the Swiss watch industry dramatically
lost market share (Figure 1), while the per unit export price for such Swiss
1. In 1971, the United States unilaterally terminated convertibility of the US dollar to gold.
This marked the end of the Bretton Woods Agreement established in 1944 which
provided for a system of fixed exchange rates after World War II.
2. Documentation of the history of SSIH 1930–1980, p. 49. Found in the Swiss Economic
Archive Basel.
27
watches increased from CHF 47 in 1974 to CHF 148 in 1982. The resulting
losses revealed the structural problems in the Swiss watch industry. The
business of homeworkers in the Swiss watch industry was basically eliminated
and even established companies had to dismiss thousands of skilled workers
(Figure 2).
4.1 Swiss technology commercialized elsewhere

Switzerland recognized the potential of electronic watches for the automatization
of work processes in watch manufacturing but failed to anticipate the extent
to which it would change the entire industry. In 1950, while working for the
American company Bulova in Biel, Switzerland, the Swiss Max Hetzel developed
Accutron, the first “electronic watch” and a forerunner of modern quartz
watches. In the late 1960s, a subsidiary of ASUAG secured access to Bulova’s
know-how in chip production by signing a cross-licence agreement3.
Yet, the leaders in the Swiss watch industry did not just react to the electronic
watch by imitating foreign innovations, but proactively decided to establish their
own national watch research centre called the Centre for Electronic Watches
(Centre Electronique Horloger – CEH) in Nêuchatel in 1962. The CEH’s main
purpose was to develop a “Swiss made” quartz wristwatch. In 1967, the CEH
presented the world’s first prototype analogue quartz wristwatch: the Ébauches
SA Beta 21. Yet, the Japanese company Seiko came up with the world's first
commercial quartz wristwatch, the Astron. This watch was released just prior
to the introduction of the commercial version of Ébauches SA Beta 21.
Despite being a technological leader at the beginning of the electronic age of

the global watch industry, the core competence of the Swiss watch industry
was with the production of mechanical watches. In fact, Swiss excellence in the
28
The crisis in the 1970s
production of mechanical watches constituted part of Swiss national identity

and was embodied firmly in the “Swiss made” label. There was therefore great
reluctance in Switzerland to invest in the commercialization of cheaper quartz
watches. While the Swiss were worried about possible cannibalization effects,
competitors abroad understood the potential of the technology and further
improved it.
4.2 The role of the Swiss banks

The global economic and technological transformation of the watch industry
in the 1970s caught the two largest Swiss watch companies, SSIH and
ASUAG, on the wrong foot. By the 1970s, SSIH was the largest producer of
wrist watches in Switzerland and globally the third largest company for
finished watches with a turnover of more than CHF 700 million. The second
most important player in the business of finished watches in Switzerland was
the General Watch Co. Ltd. (GWC). The holding contained 14 different Swiss
watch brands (see Figure 8). It was acquired by ASUAG in 1971. In both
companies, SSIH and ASUAG, the role of the banks became decisive. The
Union Bank of Switzerland (Schweizerische Bankgesellschaft) became by far
the largest shareholder of SSIH and ASUAG was dominated by a consortium
of Swiss banks under the leadership of the Swiss Bank Corporation
(Schweizerischer Bankverein).
4.2.1 SSIH before the merger

The financial troubles of SSIH had already become apparent in the first half
of the 1970s. The company amassed huge inventories and its sales volume
declined from 14 million time pieces in 1973 to 6.3 million in 1978. The
company reduced its personnel in the same period by 20 per cent and its
turnover declined from CHF 733 million in 1974 to CHF 662 million in 19784.
4. Documentation of the history of SSIH 1930–1980, p. 58. Found in the Swiss Economic
Archive Basel.
29
SSIH did undertake efforts to adapt its production and organizational

structure to the new market realities, reinforced research and development,
and strengthened its marketing. But all this did nothing to improve its market
position. Reserves melted away, and assets declined to an extent that new
capital from the Swiss banks had to be injected constantly. At a later stage
this new capital was converted into shares making the Union Bank of
Switzerland (UBS) the principal shareholder. Additional Swiss banks with
minor stakes in SSIH were the Swiss Bank Corporation (SBC), Credit Union
(Volksbank), and the Bernese Cantonal Bank.
As SSIH became insolvent, its creditor banks assumed control in 1981. The
UBS Banker Peter Gross became president of the governing board of SSIH. In
search for someone who could manage the turnaround of the company, he
asked Hayek Engineering AG to screen especially the two most valuable brands
of SSIH, Omega and Tissot. They had incurred heavy losses and restructuring
was unavoidable. However, restructuring efforts of SSIH in 1981, based on the
analysis of Hayek Engineering AG and under the auspices of Mr Gross,
completely failed to save the company5. Based on the consolidated profit and
loss statement of ASUAG-SSIH, the Neue Zürcher Zeitung (NZZ) journalist
Hansjörg Abt concluded later that SSIH, and within SSIH, Omega in particular,
was actually the sick patient in this merger of unequals6. The Weltwoche
journalist Oliver Fahrni went even further in an article published in 1985. He
argued that Peter Gross had failed to restructure Omega already back in 1981
and that only the merger with ASUAG made it possible to save this valuable
SSIH luxury brand from the collapse7. The consolidated financial statements of
5. Hadorn, Werner., 2016, Swatch Geschichte: So war es wirklich. Interview mit Pierre
Renggli. Biel/Bienne Wochenzeitung (8/13) 24/25 Februar 2016: 3 (available online:
http://www.bielbienne.com/tl_files/BB.16/bb_aktuell.pdf).
6. Abt, Hansjörg, 1984, Die Omega als Sorgenkind der Asuag-SSIH, Mageres Ergebnis
dreijähriger Restrukturierungsbemühungen, NZZ, 20.06.1984.
7. Fahrni, Oliver, 1985, Das tickende Paket ist vortrefflich geschnürt, Die Weltwoche, 31.
Januar 1985.
30
SSIH, published on 31. December 1980, 1981 and 1982, respectively, confirm
these allegations: the losses were CHF 161.6 million in 1980, CHF 38.4 million
in 1981 and CHF 17.1 million in 19828.
Figure 12 shows that consolidated equity of SSIH had started to sharply

deteriorate back in 1976. This also had to do with consolidated sales that
were mostly downward trending after 1974. This is in sharp contrast to
ASUAG, which showed a very solid equity situation throughout the 1970s
and had upward trending sales before the watch crisis hit the company
(Figure 11).
4.2.2 ASUAG before the merger

In the 1970s, ASUAG was the world’s largest producer of movement blanks
and movement parts. At that time, ASUAG was seeking vertical integration
in response to the end of the “Watch Statute”. With the acquisition of the
General Watch Co. Ltd. (GWC) ASUAG’s turnover grew from CHF 760 million
in the 1970s to CHF 1.4 billion in 1974 with watches and finished movements
assuming a share of 43.9 per cent (before it was merely 5 per cent)9. While
ASUAG grew in size, the Swiss federal government reduced its stake in the
company from 38 per cent in 1971 to 8 per cent of the shares in 197810.
ASUAG nevertheless stuck to its original state-mandated mission to supply
watch components to all Swiss watch companies on equal terms. The
gradual withdrawal of the government eventually made a fundamental
8. SSIH Schweizerische Gesellschaft für Uhrenindustrie AG, Geschäftsbericht 1980 –

1981, Geschäftsbericht 1981/1982, Geschäftsbericht 1982/1983. Zentrale für
Wirtschaftsdokumentation, Universität Zürich. Sales of Omega declined from CHF 269.4
million in 1979 to CHF 217.6 million in 1980.
9. Donzé. P.-Y., 2014, A Business History of the Swatch Group: The Rebirth of Swiss
Watchmaking and the Globalization of the Luxury Industry. Palgrave Macmillan.
10. Katzenstein, p. 218; BBL 1983 III 945. Botschaft über die Veräusserung der
Beteiligung des Bundes am Aktienkapital der Allgemeinen Schweizerischen
Uhrenindustrie AG vom 14. September 1983. p. 952.
31
restructuring of the company possible but also resulted in an increase in debt

compared to equity.
According to Donzé11, the watch crisis that started in 1975 was not a result of
the quartz revolution (product innovation) but due to the structural unsuitability
of the Swiss watch industry to acquire new technologies and to integrate them
into the production system (process innovation). Unlike the Swiss, the
Japanese were capable of mass producing high-quality mechanical watches.
As a result, their mechanical watches became cheaper while the Swiss ones
became ever more expensive (partly also because of the appreciation of the
Swiss franc). This caused the global market share of Swiss mechanical
watches to fall steadily. Strengthened and supported by the watch statue
(1934–1971), the dispersion of the industry between numerous independent
companies precluded a rationalization of the production of parts and
movements for high-quality mechanical watches. In 1978, when Ernst Thomke
was appointed as head of Ébauches SA (subsequently renamed ETA SA), the
movement manufacturer that belonged to ASUAG, he initiated a profound
restructuring process by merging and streamlining the various subsidiaries of
the holding company Ébauches SA. This made it possible to invest first of all
in process innovation, introducing automation technology in piece and part
manufacturing. As a result of this restructuring, ASUAG would eventually be
able again to compete with the Japanese in the segment of high-quality
mechanical watches12. In addition, it started with the manufacturing of quartz
watches. The share of quartz watches and movements in the production of
ASUAG stood at 9.3 per cent in 1975 and climbed up to 77.2 per cent (number
of units) in 1982. Designing, prototyping and the production of new products
and processes were reconfigured in a short period of time and lead to a
fundamental transformation of the company. In addition, ASUAG competed
12. Ibid.
32
with the Japanese in the field of product innovation. In 1978, Ébauches SA

already won the contest for the thinnest watch by presenting the slimmest
watch called Delirium (Box 3).
Aside from Delirium, ETA SA developed the novel Swatch concept with a
completely separate team. Dr Thomke supported the idea developed by two
brilliant engineers who came up with the concept of a cheap quartz watch made
out of plastic. He freed them from all other responsibilities in the company, made
them directly accountable to him and protected them from internal broadside.
After 18 months they were able to come up with a working prototype. This
prototype was cheap but not very attractive. A marketing concept was
subsequently developed to make the Swatch “chic”, to make it “fashion that
ticks”. Fashion designers were subsequently asked to design a colourful “rolex
for ordinary people”13 (Box 3). This revolutionary product innovation eventually
helped ASUAG to overcome the quartz crisis that threatened the Swiss watch
industry in the early 1980s.
In retrospect, the product and process innovation would not have been
possible without a CEO like Ernst Thomke. He combined entrepreneurial
spirit, science and engineering skills with the instinct of recruiting the right
people and had the courage of the outsider to take on the conservative
corporatist culture that prevailed within this large watch company14.
In contrast to SSIH that had been in financial troubles for many years, ASUAG’s
financial situation only started to deteriorate considerably by 1981 at the onset
of the worldwide watch crisis due to the oversupply of quartz watches from
Japan. Moreover, its market share for mechanical watches and mechanical parts
was still eroding. Since prices for Swiss mechanical watches did not decline at
13. Garel, Gilles and Elmar Mock, 2016, The Innovation Factory: Taking the Plunge.
Auerback Publications.
14. Ibid.
33
Box 3 Delirium and Swatch

In the 1970s, Gedalio “Gerry” Grinberg, the founder and chairman of the
Movado Group and the main distributor of Swiss watches in the United
States became increasingly impatient with thick Swiss mechanical watches.
He threatened Swiss watch exporters to buy thin Seiko watches available
in Japan, unless they come up with something similar on their own. As a
consequence, Ernst Thomke, the CEO of ETA and board member of
ASUAG, asked Urs Giger, head of R&D at ETA to organize a joint team with
the technical directors of CEH in Neuchâtel and Renata, a coin battery
manufacturer in Itingen near Basel, to develop a watch that would
outcompete any other available watch in terms of thinness. The design
engineer Maurice Grimm made use of a well-known idea to directly mount
the watch components onto the case back (Platine) to economize space.
As a result, the so-called Delirium watch was developed. Its thinness was
1.97 mm and thus outcompeted the Seiko model (2.5 mm). With its metal
frame it was, however, quite delicate and expensive. Its commercial success
was thus limited to the Concord Delirium, for which Gerry Grinberg obtained
the marketing rights. continued on page 35
that time, the demand shrunk and the sales of ASUAG temporarily fell to an
unprecedented low level.
Figure 3 shows that ASUAG remained the worldwide leader in exports of

movement blanks. But, the production declined considerably from roughly
20 million in 1981 to only 13 million pieces in 1982. The value of these exports
declined from CHF 382 million in 1981 to CHF 256 million in 1982. Yet, as of
December 31 of 1981, ASUAG still had consolidated equity of CHF 321 million
combined with consolidated debt of CHF 799 million. Its annual consolidated
turnover was CHF 1 413 million15. For many years, equity was between 40–50
34
Box 3, continued from page 34

The president of the governing board of ASUAG, Pierre Renggli, suggested
to Ernst Thomke to create a cheap watch for the mass market under the
brand of Certina. Dr Thomke subsequently wrote the specification sheet for
the development of an inexpensive, reliable, waterproof watch that could be
manufactured in a fully automated way in Switzerland. He then embraced
the idea of Elmar Mock and Jacques Müller to develop an affordable plastic
quartz watch. It was called the Vulgaris Project. The watch itself was
eventually called the “Swatch”. Its architecture and conceptual idea was very
different from the one of Delirium. Swatch was produced in a fully automated
way, which made it possible to reduce the labour costs to a tenth of the total
production cost. It consisted of only 51 components and its production costs
were far below those of mechanical watches. The idea of a cheap and mass-
produced plastic watch broke with all traditions in the watch industry, while
the Delirium was merely based on shifting “traditional parts of a watch
around towards the edge in order to flatten them”.
Source: Carrera, Roland, 1992, Swatchissimo 1891–1991. Antiquorum.
per cent of current assets (Umlaufvermögen) and only dipped below this mark
in the difficult year of 1982. Equity as a share of borrowed funds was always
above 50 per cent until 1980, then dropped to 40 per cent in 1981 and then
apparently vanished in 1982. The worsened financial situation was also related
to the fact that the sales of Ébauches S.A., which always had been the
financial pillar of ASUAG, declined by 32.4 per cent in 198216. Figure 11 in the
Annex shows how consolidated sales and employees evolved from 1973 to
15. ASUAG, 1983, Geschäftsbericht 1982. Swiss Economic Archive Basel. p. 6.

16. Ibid. p. 10.
35
1982. While consolidated sales increased between 1976 to 1981, the number
of employees steadily declined, which meant that per capita consolidated
sales increased from CHF 64 100 to CHF 99 44017. This resulted in a huge
improvement of the productivity. The company’s management took additional
immediate measures in 1982 such as the introduction of short time work and
the reduction of inventories that stood at very high levels, resulting in massive
depreciations.
Figure 11 depicts how current assets and consolidated equity were very stable
until 1981. While current assets dropped by 19 per cent in 1982, consolidated
equity totally vanished, and ended in a negative amount of minus CHF 22.5
million in 1982 – hinting at some irregularities prior to the planned ASUAG-
SSIH merger.
17. Ibid. p.6.
36
Chapter 5
A merger of unequals: SSIH and
ASUAG become SMH
n response to the problematic financial situation of ASUAG since 1981, a
I steering committee, a so-called Steuerungsausschuss (STEA), constituted as

a supervisory and decision-making body, assumed responsibility for the
company on June 30, 1982. The members of this steering committee mainly
represented the creditors of the company. At that time, the involved Swiss banks
decided already in favour of a standstill agreement ensuring that ASUAG and
SSIH would keep their credit lines until June 30, 1983. Peter Gross from UBS
then suggested to commission a study from Hayek Engineering AG to screen
ASUAG since he would be familiar with the watch industry based on his prior
involvement in the restructuring efforts of SSIH1. The study did not find any sign
of negligence in the area of business management. It even concluded that
ASUAG had real chances to survive and that it could be reorganized in a way to
be again profitable2. However, the study was considered to contain too many
inconsistencies and all copies were subsequently returned and eliminated3.
At the same time, a comprehensive reorganization took place in ASUAG:

restructuring measures were initiated and the sale or closing of several
operations within the group were ordered4. Despite all these efforts, ASUAG
1. The restructuring of SSIH in 1981 is explained in detail in the SSIH Geschäftsbericht

1981/1982. p. 6.
2. Annual report ASUAG 1983.
3. Graden, Tobias, 2016, Wie Nicolas G. Hayek zur Swatch Group kam. Bieler Tagblatt, 04.03.
2016.
4. BBl 1983 III 945. Botschaft über die Veräusserung der Beteiligung des Bundes am Aktien-
kapital der Allgemeinen Schweizerischen Uhrenindustrie AG vom 14. September 1983. p. 951.
37
had to disclose a loss of CHF 42 million in the first half of the year 1982, for
the first time. This induced the Swiss banks, which were heavily implicated in
SSIH and ASUAG, to consider the idea of merging the near bankrupt SSIH
with ASUAG. Such a step would save UBS the embarrassment and the costs
of letting SSIH go bankrupt while portraying the bank and its consortium as
patriotic actors determined to save the watch industry.
However, the president of ASUAG, Pierre Renggli, did not see the industrial,
organizational, and financial advantages in absorbing a near bankrupt SSIH
because despite the difficult short-term challenges related to the watch crisis,
his company was in good shape, as the contentious Hayek study commissioned
by the banks also confirmed. ASUAG was well organized, had a great portfolio
of intellectual property rights and was ready to conquer global markets with the
Swatch, which was already launched at that time, independent of whether the
company was merged with SSIH or not.
Based on the financial facts, ASUAG was not bankrupt and could not be
restructured on the grounds of Swiss insolvency law. This made it indeed
difficult for SBC and UBS to justify the merger. SBC, which had the largest
stake of the banks in ASUAG, therefore instructed the chief controller of
ASUAG, to implement the suggested financial engineering (mainly through
massive write-offs) to convert CHF 590 million5 in equity into a negative equity
of CHF 22.5 million6. The Swiss Trust Company (Schweizerische Treuhand
5. The equity capital of CHF 590 million as mentioned by the former Chief Financial Controller
of ASUAG, Dirk Schröder, is contested by Bruno Bohlhalter, a former banker of Volksbank
(and later Credit Suisse) who recently published his PhD on the history of the watch industry.
In a recent article in the Bieler Tagblatt (“Kampf um die Deutung der Geschichte”. Bieler
Tagblatt, 02.03.2016, p. 2–3) by Tobias Graden, Bohlhalter argues that the equity capital of
ASUAG was CHF 321 million. Schröder, however, argues that the number of Bohlhalter refers
to the equity capital one year before the merger (as reported in the ASUAG annual report), the
one he prepared for the tax declaration in 1982 was however CHF 590 million but has never
been published since it was depreciated later in the year to minus CHF 22.5 million.
6. Personal Communication with Dirk Schröder, former Chief Controller of ASUAG, January 2016.
38
A merger of unequals
AG), which was 100 per cent owned by SBC, did then the audit of ASUAG in
1982 and approved the balance of accounts7. This meant that the company
was regarded as technically bankrupt like the SSIH, but with the difference
that this result had been generated artificially and did not reflect the reality of
the company. The negative result, confirmed by the audit, increased pressure
on the management and the minority shareholders of ASUAG to agree to the
forced merger with SSIH. By today’s standards, such a “self-evaluation”
would probably be illegal and absolutely incompatible with principles of good
corporate governance.
Based on the Hayek study and the audit, the steering committee (STEA)
convened a secret conference in Interlaken in mid-January 1983 where the
banks finally decided to merge ASUAG and SSIH. The UBS banker and
chairman of the governing board of SSIH Peter Gross later explained in an op-
ed in NZZ in May 1983 that the banks decided to carry out a capital cut that
might affect some of the existing shareholders of ASUAG8. At the same time,
the banks were committed to provide new capital for the newly merged
company. The decision in favour of the merger was also framed as a patriotic
commitment of the banks to ensure that the production of Swiss mechanical
and quartz movements remains in Switzerland. It was, however, also pointed
out in the press that it was an open secret in Biel that the merger primarily served
the purpose of helping Peter Gross to save his ailing company (SSIH-Omega)
by making its troubled legacy disappear through the merger9. Yet, Bruno
7. In the annual report 1983 the balance sheet of ASUAG was presented as follows: Per
December 31, 1982 ASUAG had a negative balance of CHF 156.5 million. This loss
exceeded the company’s own assets which stood at CHF 134 million and consisted in CHF
75 million shareholder capital and CHF 59 million in reserves. The result was an over-
indebtedness of 22.5 million CHF.
8. Gross, Peter, 1983, Die Schweizer Uhr hat reelle Zukunftschancen. NZZ, 13. Mai,1983,
p. 17.
9. Fahrni, Oliver, 1985, Das tickende Paket ist vortrefflich geschnürt, Die Weltwoche, 31.
Januar 1985. In the same article it is reckoned that the balance sheet of Omega had been
tampered with by moving inventories to stores.
39
Bohlhalter, who represented the interests of the Volksbank (which was later
bought by Credit Suisse) back then concludes in his PhD thesis in 201510 that
this step proved that the Swiss banks were acting responsibly – allegedly having
the public rather than their private interest in mind. He conceals, however, the
private interest of Peter Gross to avoid the embarrassment he would have faced
as a director general of UBS and former chairman of the governing board of
SSIH, if SSIH would have gone bankrupt. Moreover, the demise of SSIH would
have affected numerous other companies in the industry that were suppliers to
SSIH and highly indebted with the Swiss banks, especially UBS. It was therefore
quite convenient to avert bankruptcy of SSIH by merging it with ASUAG, a
company that may have been in financial distress since the quartz crisis in 1981
but was well restructured under Pierre Renggli and his team. The commercial
potential of ETA’s newly developed Swatch became clear when a first batch of
20 000 pieces was practically sold within 14 days at the beginning of 1983.
Neither Nicolas Hayek nor Peter Gross did initially acknowledge the potential
of Swatch, discarding any claim that this new plastic watch could become a
huge commercial success for ASUAG as a whole that would also lift the rest
of the Swiss watch industry out of crisis11. The failure to acknowledge the
potential of the Swatch is not surprising because admitting that ASUAG may
have great future prospects would have been equal to admitting that it was a
merger of unequals.
Ultimately, it turned out that the Swiss watch industry was neither saved by the
Swiss banks nor by Nicolas Hayek but by the great efforts of the skilled managers,
designers and marketing experts of the watchmaking region of northwestern
Switzerland to restore the competitiveness of ASUAG prior to the merger. The
10. Bohlhalter Bruno, 2015, Die Uhrenkrisen der 1930er- und 1970/80er-Jahre in der
Schweiz: Entstehung und Bewältigung. Dissertation in Contemporary History at
University of Fribourg, Switzerland.
04.03. 2016.
40
company may have faced temporary financial problems in 1982 but that was
mainly because so much had been invested in the renewal of the company.
These investments paid out and helped to bail out SSIH in the long run.
The merger of unequals had particular consequences for the minority

shareholders of ASUAG (representing smaller players in the watch industry
and private persons) who were affected by the decision of the steering
committee to carry out a capital cut designed to facilitate the merger. The
minority shareholders held 55.5 per cent of the shares12 and for every old
ASUAG share they were offered a new share of the merged SSIH-ASUAG
that was worth a tenth of the prior value. The devaluation reduced the share
of ownership of the minority shareholders13 to 2.5 per cent whereas the banks
massively increased their capital stake through debt conversion of bank loans
into new shareholder capital making the banks the de-facto owners after the
12. Banks held 36.5 per cent and the Swiss Confederation 8 per cent of the shares. This
was the structure of the shareholder capital after the increase of capital in 1978. Source:
Asuag, 1981, Asuag 1931–1981, Von der Verwaltungsholding zur operationellen
Industriegruppe. p. 14.
13. Annual report ASUAG 1983. Report of the steering committee. “The share capital of par
CHF 75 million is reduced to CHF 7.5 million, which corresponds to a reduction of 90 per
cent or CHF 67.5 million. p. 4 […].
Point 5.2: Reduction of the shareholder capital to CHF 7.5 million: the governing board
proposes to the general assembly to reduce the shareholder capital from CHF 75 million,
composed of 375 000 bearer shares of par CHF 200 each, to CHF 7.5 million, which is CHF
67.5 million, by a reduction of the nominal value of the shares of 90 per cent to CHF 20.
Increase of the shareholder capital to CHF 200 million: the governing board proposes to the
general assembly to increase the shareholder capital from CHF 7.5 million to CHF 200
million by an emission of 1 925 000 shares of par CHF 100 each. The right of the
shareholders to subscribe to these shares has to be excluded, given that the payment in full
is entirely done by converting existing debts by the banks into shareholder capital.”
The aforementioned article in the Bieler Tagblatt (“Kampf um die Deutung der Geschichte.
Bieler Tagblatt”, 02.03.2016, p. 2–3) by Tobias Graden refers to the new facts found in the
economic archive at the University of Basel, and also mentions a former shareholder of
ASUAG who protested against the planned expropriation of former shareholders by the
Swiss banks. She was finally compensated for the loss by the SBV general director Walter
Frehner, but had to sign an agreement to remain silent about the case. These irregularities
were also addressed in Bettina Hahnloser’s book “Der Uhrenpatron und das Ende einer
41
merger. At SSIH, on the other hand, shares were exchanged one to one14. As
SSIH was almost entirely in the hands of banks (before the merger: 96.3 per
cent; afterwards 92.6 per cent) and only few other shareholders existed, their
loss was minimal15.
The motivation of the involved banks for the massive financial engagement was
not only to prevent a disaster in the economy and to keep its face but also to
recuperate at some point the money that had been pumped into the watch
industry16. Hansjörg Abt pointed out that the banks were in a double role as
creditors and owners (98 per cent of Asuag-SSIH shareholder capital) and
therefore had to bear the full risk and with it the leadership responsibility. As
banks usually do not want to end up as long-term owners of a company, it was
clear17 that, at some point, they would pull out of the sector.
Ära” (NZZ Libro 2015) and discussed in a book review in the Swiss newspaper ‘der Bund’
(Wie Grenchen dank der Familie Schild zur Uhrenmetropole wurde, 10.11.2015).
The same shareholder wrote in a letter dated from August 30 1983 (found in the economic
archive at the Univeristy of Basel) to the president of the governing board of Asuag (F.
Millet), the president of the governing board of Ébauches SA (W. Frehner), and to the
director of the Swiss trust company (Bysäth). In that letter she laments that the information
provided at the general assembly of Ébauches SA from June 30 1983 was unsatisfactory.
She finds that the situation of the company’s assets was much better than officially
portrayed. She also questioned the conversion of Ébauches shares to Asuag shares as the
assets still amounted to CHF 222 million. Further she criticizes the information policy of the
responsible persons and the inadequate information received from the auditing agency,
even more so as the governing board would not accept a representative of the minority
shareholders. She asks for several changes of the information policy at general assemblies.
14. ASUAG-SSIH, 1984, Bericht des Verwaltungsrates gemäss Art. 650/630 des
Obligationenrechts.”4.3 The merger takes place by exchanging shares of SSIH into shares
of Asuag-SSIH according to the following share exchange ratio:
a) The shareholders of SSIH receive for eight registered shares of par CHF 2.50 one Asuag-
SSIH registered share of par CHF 20. […]
b) The shareholders of SSIH receive for four bearer shares of par CHF 5.00 one Asuag-
SSIH bearer share of par CHF 20.
15. Personal Communication with Dirk Schröder, former Chief Controller of ASUAG,
January 2016.
16. Abt, Hansjörg, 1985, Entlassung der Asuag-SSIH aus der Obhut und Verantwortung der
Banken?, NZZ, 17. Januar, 1985.
17. Ibid.
42
The Swiss government agreed to completely pull its remaining shareholding

capital out of ASUAG and leave the company to market forces18. Yet, it did not
raise any antitrust concerns related to the merger (Box 4). This eventually paved
the way for a huge conglomerate that once was a government sanctioned
monopoly to be converted into a private monopoly. Hardly an act that proved to
be in the public interest.
5.1 How a former state monopoly became a private monopoly

At the end of 1983, the ASUAG-SSIH merger was completed and the new
company was named ASUAG-SSIH holding. The new structure resulted in a
concentration of industrial activities such as research and development (R&D)
and production under the umbrella of the ETA company in Grenchen, formerly
owned by ASUAG. By the end of 1983, ETA already had sold 1.1 million
Swatches. Even though the good start of the Swatch ensured that marketing
costs were covered and machines could be written off, there was no profit
yet resulting from the Swatch business. As a consequence, the ASUAG-SSIH
still incurred losses in 1983. Yet, in 1984, 3.7 million Swatch watches were
sold and the Swatch AG was founded with the purpose to market the ETA-
manufactured Swatch. The marketing concept and philosophy of Swatch was
developed by Franz Sprecher who was an ETA employee since 1981. After
making Swatch a profitable business, Ernst Thomke was also asked to
restructure the loss-making brands of SSIH. He reorganized first Tissot
company in 1984 and in 1985 Omega by refocusing the brand on a limited
number of models with a strong identity and to accentuate the connotation
of high-end luxury attached to this brand. This paved the way for the
economic recovery of Omega19.
18. BBl 1983 III 945. Botschaft über die Veräusserung der Beteiligung des Bundes am
Aktienkapital der Allgemeinen Schweizerischen Uhrenindustrie AG vom 14. September
1983. p. 952.
43
By then, Nicolas Hayek was the president of the governing board of SMH. He
approved of the successful reorganization of the Tissot and Omega brands
but was not directly involved in the actions20. Yet, Ernst Thomke seemed to
have disliked the way Peter Gross and Nicolas Hayek tended to appropriate
the story of the successful restructuring of the Swiss watch industry as their
achievement. In a letter also found in the economic archive of the University of
Basel and cited in a recent article in Tages-Anzeiger, he points at the fact that
Peter Gross and Nicolas Hayek were largely accountable for the prior failure to
restructure Tissot and Omega and would therefore have no right to portray the
successful restructuring of the watch industry as their achievement21.
The stunning success of Swatch in 1984 was also related to the recovery
of the global economy. Floating exchange rates were then well established,
the transition to the electronic era was accomplished and watch technology
had stabilized. In 1985, the 10 millionth Swatch was sold22, and its sales
contributed considerably to the excellent performance of ETA company. The
global success of Swatch allowed the company to enhance the worldwide
awareness also for other famous mechanical Swiss watch brands such as
Rado and Longines (formerly owned by ASUAG) and Tissot and Omega
(formerly owned by SSIH).
In 1985, the SSIH-ASUAG merger was re-named SMH. This new watch
conglomerate under the operational leadership of Ernst Thomke became a
global leader in watch production and technology. It had reduced its workforce
by half, operated with the most up to date facilities, had new very successful
products such as the Swatch and excellent engineers and managers. Yet, the
banks never had the intention to remain the de-facto owners of SMH and were
21. Mettler, Jon, 2016, Zweifel and Hayeks Erfolgsgeschichte. Tages-Anzeiger, 5.3. 2016.
22. https://de.wikipedia.org/wiki/Swatch
44
Box 4 How the ASUAG-SSIH merger was portrayed officially

The banks and governing boards of SSIH and ASUAG argued that a merger
was necessary in view of the dire financial situation of both companies. They
also argued that the two companies suffered from several interface
problems that affect the whole Swiss watch industry. By merging the two
companies, synergies in the areas of finished watches, movements and
cases as well as an appropriate clustering of activities could be achieved;
this would then lay the grounds for an improvement of capacity utilization
which in turn would contribute to securing jobs. At the ordinary general
assembly from June 29 of 1983 the following financial restructuring
measures were endorsed: The banks forwent outstanding debts of CHF 30
million. With this, ASUAG’s alleged over-indebtedness of CHF 22.5 million
was eliminated, and CHF 7.5 million in share capital was created. This share
capital represented a tenth of the previous nominal share capital of CHF 75
million. The banks then injected another CHF 392.5 million by netting against
liabilities in order to regain a sufficient asset basis of about a third of the
balance sheet total. This sum together with the CHF 7.5 million of share
capital provided the new capital basis of CHF 400 million. After the merger
with SSIH, the share capital of ASUAG-SSIH was CHF 300 million (share
capital ASUAG 200 million, share capital SSIH CHF 100 million). In order to
fulfill the minimal equity requirements for the merger, the implicated banks
had to ask for an exception from the Swiss Federal Banking Commission
(now FINMA). It was granted because the restructuring was seen in the
interest of the whole economy. After the merger, ASUAG-SSIH consisted of
three groups: finished watches, movements & parts, and industry products,
which were then integrated into a financial holding. The three groups were
organized and managed independently.
Source: BBl 1983 III 945. Botschaft über die Veräusserung der Beteiligung des Bundes
am Aktienkapital der Allgemeinen Schweizerischen Uhrenindustrie AG vom 14. Septem-
ber 1983. p. 951; Eidgenössische Bankenkommission, 1983, Jahresbericht. p. 31–33.
45
in search of a buyer. Peter Gross encouraged Nicolas Hayek to buy a stake in

the merger as early as 1984. He was then able to convince the bank consortium
that Nicolas Hayek should be given the opportunity to acquire a majority stake
in SMH provided that he was able to raise the necessary financial means.
Stephan Schmidheiny helped him do so. Together they acquired an initial stake
of 7 per cent in January 1985. He then was able to put together a pool of
investors which managed to exercise the option to acquire a 51 per cent stake
(estimated value CHF 153 million) in SMH by September 1985. Even though
CHF 153 million corresponded to the nominal value of the shares, it can be
considered as a very favourable bargain in view of the fact that SMH employed
12 000 people in 90 factories and research centres and owned well-known
brands such as Omega and Longines, and last but not least the Swatch itself.
The brand value of Omega alone was estimated to be CHF 300 million during
the years of crisis when foreign companies showed some interest in the
purchase of the brand23. Moreover, the assets of ASUAG-SSIH not only
comprised the shareholder capital of CHF 300 million but also free reserves of
CHF 120 million and CHF 169 million in provisions. Reserves that, most
probably, had asset character. The commerical value of ASUAG-SSIH was
estimated in 1983 to be around CHF 0.5 billion, once agio on the occasion of
the reorganisation was also taken into account24.
Hayek’s pool of investors included additional investors such as Esther

Grether, Peter E. Baumberger, and Franz Wassmer. Most of them were heirs
of large and well-known family businesses25. They all signed a shareholder’s
agreement designed to give Nicolas Hayek the sole voting right for the pool.
04.03. 2016.
24. Abt, Hansjörg, 1985, Entlassung der Asuag-SSIH aus der Obhut und Verantwortung
der Banken? Fortgeschrittene Verhandlungen mit potentiellen Investoren, NZ, 17.01.1985.
25. Donzé, P.-Y., 2011, La circulation des richesses. Le retour de l'industrie horlogère
suisse sur le marché mondial: une Business History du Swatch Group (1983–2010) (No.
4). Université de Neuchâtel.
46
At the core of the “Hayek pool” was the so-called WAT-Holding, controlled
by Nicolas G. Hayek (until 2010) and Stephan Schmidheiny (involved until
1993). The WAT-Holding was eventually controlling 33.3 per cent of SMH
shareholder capital.
Since UBS Banker Peter Gross appears to have played a crucial role in
facilitating this favourable deal as former president of SSIH and promoter of
Nicolas Hayek, his favour was returned: from 1985 onwards he was on the
board of SMH, and from 1998–2011 he was vice-president of the governing
board of the Swatch Group. Equally, Walter Frehner who was director general
of SBC and member of the governing board of ASUAG was also rewarded
with a post as vice-president of the governing board of SMH which he held
until 1997.
In July 1993, the equity capital of SMH was financially restructured. According
to Dirk Schröder26, the official purpose of the restructuring was to split and
standardize the SMH share capital (CHF 331 263 000) and to issue new
nominal shares of a value of CHF 10 per share (CHF 15 030 000) and bearer
shares of a value of CHF 50 per share (CHF 3 619 260). By cutting the value
of a new nominal share from originally CHF 100 to CHF 10, a “people’s share”
representing one vote for one share was apparently created. Ultimately, the
nominal capital value of the company remained the same. However, the effect
of this financial engineering was that the 51 per cent majority ownership of
the Hayek pool of investors was no more based on the value (CHF 153
million) but the number of shares (18 641 260), independent of whether these
were nominal or bearer shares. The reduction of the nominal value in the
Hayek pool of investors took place by selling the original shares at market
prices which peaked in July 1993. The adjustment from share value to
numbers of shares in the 51 per cent majority ownership as well as the selling
26. Dirk Schröder, 1994, Bieler Wirtschaftsbrief, Nr. 77, 27.01.
47
of the liquidated nominal value of the Hayek Pool of investors brought

substantial monetary gains without losing influence. This may also explain
the willingness of Stephan Schmidheiny to cede control of operating
decisions and responsibility to Hayek by chosing bearer shares for practical
reasons. This allowed Hayek to de-facto control SMH with effectively only
13 per cent of its shares [..]”27. The financial engineering also resulted in a
liquidation profit for the Hayek-pool members of CHF 1 895.6 million in cash,
according to the analysis of Schröder28. Taking this into consideration, the
withdrawal of Schmidheiny in 1993 from the WAT Holding makes sense from
a profit-maximizing point of view: the market value of his SMH-share package
increased by CHF 1 295 million. SMH shares outside the Hayek-pool in the
hands of small investors as well as pension and investment funds in 1993
may have reached a market value of up to CHF 5 958.9 million. Yet, they
would only have had 44.9 per cent of the votes. The question then was how
recoverable in value these shares were taking into account that the total SMH
market capitalization of CHF 8 715 million stood against assets of only CHF
1 575 million. Schröder considered the huge difference to be just “air” based
on words only.
5.2 Pretending to be Robin Hood while representing the establishment

The NZZ journalist Hansjörg Abt noticed a lack of transparency in the financial
statement of SMH already in 199129. He complains that the annual report of
this public company does not contain any quantifiable information about
the profitability of the different brands and the numerous markets in which
Swatch Group was active. This makes it hard for him to understand how the
unfavourable global market environment in the second half of 1990 (mainly
27. Breiding, R. James, 2012, Swiss Made: The Untold Story Behind Switzerland’s
Success. Profile Books Ltd.
28. Dirk Schröder, 1994, Bieler Wirtschaftsbrief, Nr. 77, 27.01.
29. Abt, Hansjörg, 1991, SMH nach Golf-Turbulenzen wieder im Steigflug. NZZ,
13.06.1991: 35.
48
attributed to currency appreciation) would still lead to a higher net profit, more
liquidity and a higher degree of equity financing of the company, as presented
in the annual meeting. He attributed this success primarily to the liquidation
of reserves of more than CHF 30 million. As such, the profitability of the
company had less to do with real success in the operative business but with
financial engineering. In fact, the shoring up of the share price and the
generous dividends for shareholders under Nicolas Hayek make sense in the
context of the planned restructuring of the SMH equity capital in 1993. In view
of this clever financial engineering one must acknowledge the ability of Nicolas
Hayek to mobilize his business network and personal resources in a way that
maximize financial returns not just for himself but also his partners. Ultimately
these skills made him a billionaire. Yet, his often mentioned claim to be
an outsider that challenged the Swiss establishment in finance and watch-
making contradicts the fact that he actually owes his career to the finance
establishment and that he was not a pioneer in the watch industry but rather
inherited what others had accomplished.
5.2.1 Nicolas G. Hayek

Nicolas Hayek used to portray himself as an outsider who saved an ailing
watch business through groundbreaking and permanent innovation. In an
interview with Harvard Business Review in 199330, he argues that SSIH and
ASUAG were a mess before he arrived. Allegedly he had to convince the
banks that the Swatch might become a commercial success. Almost
everything he said in this interview appears to be a sort of confabulation in
retrospect: Whenever he begins a sentence in the interview with “we had to
[...]” he was actually referring to decisions in which he had not been involved
since they had taken place prior to his employment as a consultant of the
Swiss banks “to save the watch industry”. All the major technological
30. Taylor, William, 1993, Message and Muscle: An Interview with Swatch Titan Nicolas
Hayek. Harvard Business Review, March–April 1993 (available online).
49
breakthroughs, the automation of assembly lines in watch manufacturing, the

vertical integration strategy and the marketing idea behind the Swatch as an
emotional product that would help revive the image of the entire watch
industry, took place in the period from 1978 to 1982. Moreover, he proudly
explains how he saved the Omega brand, even though his personal attempt
to do so for SSIH failed in 1981 (Section 4.2.1) and when the turnaround had
been achieved later on, it did not happen under his leadership but first under
Ernst Thomke and his team, until his departure in 1992 and later under Jean-
Claude Biver, who joined SMH in 1993 after he sold the successfully restored
luxury watch brand Blancpain to Hayek’s conglomerate. The story of
Blancpain is remarkable because it originally belonged to SSIH. Peter Gross
and Nicolas Hayek did not seem to see any value in this brand when they sold
it to Jean-Claude Biver and Jacques Piguet for CHF 18 000 in 1983. Biver and
his team proved their marketing skills by increasing the turnover of Blancpain
from CHF 8.9 million in 1985 to CHF 56 million in 1991. SMH eventually
acquired Blancpain and Frédéric Piguet in 1992 for CHF 60 million and made
Jean-Claude Biver the boss of Omega and member of the executive board of
Swatch. Biver’s new team succeeded in repositioning the Omega brand. The
new marketing strategy was designed to strengthen Omega brand’s position
as an “affordable luxury” product. The brand became a vehicle for images and
emotions which tell a story, a process which creates added value and makes
it possible to turn a watch into a luxury good. Media events and clever product
placement were the cornerstone of the luxury brand marketing. Biver also
used his success with Blancpain and before Audemars Piguet as a template
to eventually help make the high-end brands of Swatch Group a global
success. When he left Swatch Group in 2003 to take on the new challenge of
restructuring the ailing watch company Hublot, the grandson of Nicolas
Hayek, Marc Hayek, partially occupied his vacancy in the Swatch Group31.
50
Nicolas Hayek essentially appropriated the achievements of the teams led

by Thomke and later Biver32 as his own. He was able to convince himself to
be a genius and maverick who is not afraid to be blunt and honest with the
Swiss economic and political establishment that would promote monetary
and economic policies that run counter to the interests of independent-
minded entrepreneurs such as him that are primarily concerned with creating
jobs in Switzerland. He was also not shy of attacking the Swiss government
for being too soft in Libya in 2009. But when he was subsequently criticized
by the media for being a hypocrite in view of his eagerness to sell watches
to dubious Arab leaders, he punished the media group concerned, called
Edipresse, by immediately ceasing to place any advertisments in the
respective newspaper causing a decrease in annual revenues of CHF 40
million to the publisher33.
In his attacks against “the establishment”, Nicolas Hayek tended to forget how
this very establishment in finance helped him to become the de-facto owner of
the Swatch Group. Moreover, the investors who made it possible for him to gain
a significant stake in SMH were all part of the Swiss industrial establishment
(Section 5.1.1). Important investors such as Esther Grether (personal care
business), Stephan Schmidheiny (cement) and Paul Wassmer (construction and
building materials) were all heirs of large industrial companies.
Finally, Nicolas Hayek was also notorious for his media announcements of
groundbreaking, far-sighted and sustainable innovation to be realized by Swatch
Group in the near future.
32. Jean-Claude Biver often points out how much Nicolas Hayek did for the Swiss watch
industry. This is not surprising in view of the fact that Hayek also enabled Biver to unfold
his potential in the watch industry and offered him very generous terms of employment.
33. Hässig, Lukas, 2009, Uhrenkönig Hayek stoppt Werbung bei Edipresse.
Handelszeitung, 29.09.2009 (available online: http://www.handelszeitung.ch/
unternehmen/uhrenkoenig-hayek-stoppt-werbung-bei-edipresse).
51
5.2.2 Smart Car

A first example was the Smart Car. The idea of a small and stylish city car
with a hybrid drivetrain was great, but SMH needed to have a partner in
the car industry. When an agreement with Volkswagen was reached in
1991, this raised great expectations, which were, however, disappointed
when the new leader of Volkswagen Ferdinand Piëch decided to call off
the deal in late 1993. Volkswagen was developing its own “three-litre car”,
the eventual Volkswagen Lupo 3L34. This concept was believed to be a
better business proposition. It was nevertheless a great opportunity for
Nicolas Hayek to present himself as the Robin Hood that challenges the
mighty car industry.
He did it again a couple of years later when he started a new alliance with
Daimler Benz AG. They ultimately designed and produced the Smart, but with
little technological input from Swatch. It also ended up as a diesel-fuelled
car. Swatch Group eventually sold its shares in 1998. Again, the story was
portrayed as innovative David (Swatch Group) versus conservative Goliath
(Daimler Benz AG).
But was Nicolas Hayek really the visionary who was too much ahead of his time
to revolutionize the car industry with an electro mobile? Was he in fact interested
in commercializing the Smart mobile? The documentary movie, made by his son
Nick Hayek who became the CEO of Swatch Group in 2003, suggests so. Nick
and his sister Nayla, who became chair of the governing board of the Swatch
Group after Nicolas Hayek died in 2010, basically replicated the marketing
strategy of their late father by portraying the Swatch Group as an innovative
company ahead of its time.
34. Sulc, Adrian, 2015, Hayeks Idee des Öko-Autos lebt weiter. Der Bund, 30.4.2015
(available online: http://www.derbund.ch/wirtschaft/unternehmen-und-
konjunktur/Hayeks-Idee-des-OekoAutos-lebt-weiter--------/story/19635450).
52
Nick Hayek’s documentary movie “The Swatch Car Project” was publicly shown
for the first time in spring 2015 with the purpose of reminding the Swiss that
Swatch Group was always committed to developing a business in the field of
environmentally friendly mobility in Switzerland.
5.2.3 Car batteries

Nick Hayek also reminded the audience that his father founded the company
Belenos Clean Power AG in 2008 with the purpose of designing car batteries
with 50–100 per cent higher capacity compared to those available on the market.
The new super battery shall be produced in Switzerland35. In January 2016, Nick
Hayek announced in the NZZ am Sonntag36 that Belenos is beginning to build a
manufacturing plant in Switzerland to produce the first prototypes of the new
batteries that were developed by a research team at ETH Zurich under Prof. em.
Reinhard Nesper and Dr Semih Afyon. They used the material Vanadium-Borat-
Glas as Electrode which may double the capacity and energy density of lithium-
Ion batteries, while keeping the volume and weight of existing batteries. This is
a great scientific achievement for the research team, but does this guarantee
commercial success? It may work in coin cells in which the technology has been
tested so far and where the expertise of Swatch-owned Renata lies, but do they
have the competence, the means and the patience to develop and mass
produce large batteries, an expensive and risky investment that is likely to bear
fruit in five to six years? And what about the competition in Asia, Germany and
the United States? Belenos is certainly not the only company that wants to bring
a super battery to the market.
Nick Hayek does not address these questions but expresses confidence to
produce the first batch of batteries by the end of 2016 and then generate a
35. Ibid
36. Hug, Daniel, 2016, Superbatterie soll Milliarden einbringen. NZZ am Sonntag,
31.01.2016 (available online: http://www.nzz.ch/nzzas/nzz-am-sonntag/schweizer-
innovation-superbatterie-soll-milliarden-einbringen-ld.4718).
53
turnover of CHF 10–15 billion with all the products related to the production of
the battery by 2020.
The article in NZZ am Sonntag triggered 41 online comments, many from

scientists and engineers. They wondered why the article in NZZ am Sonntag
did not contain any review of the progress in research done elsewhere.
German companies such as BASF, Bosch and BMW are longer in the business
of environmentally friendly and efficient car batteries and have made huge
advances. Other comments point at the progress outside Europe; for example
companies such as LG Chem or Samsung SDI in the Far East and Sakit3
in the United States are considered far ahead. Paul Wyser, who had developed
the battery for the Swatch and later set up his own company called “Wyon”,
a worldwide leader in small-sized customer-specific lithium-ion batteries,
regards such announcements by Nick Hayek as public relations (PR) events
which have little to do with the tough and risky business of battery
development and production37. A further confirmation of the focus on PR
is the governing board of Belenos, which does not just include Nick and Nayla
Hayek but also celebrities such as the actor George Clooney and the astronaut
Claude Nicollier.
5.2.4 Innovation rhetoric

Even though Nick Hayek claims that the battery will be “Swiss made” and create
thousands of new jobs, he intends to list Belenos at the Hong Kong stock
exchange and produce a factory there due to the expected demand in Asia.
While he regularly condemns the Swiss stock exchange for being dominated
by irresponsible and incompetent speculators – this rhetoric started once the
share value of Swatch Group started to decline – he seems to trust in the Hong
Kong stock exchange for doing a better job.
37. Personal Communication with Paul Wyser, 01.02.2016.
54
It is not just the innovation rhetoric and “speculator” bashing, that Nick Hayek
inherited from his father, but also the belief that he is the outsider entrepreneur
that does not owe anything to the support of the establishment. In a recent op-
ed to Schweiz am Sonntag, Nick Hayek criticizes the “banker” mentality in
Switzerland that disrespects the fruits of an energetic and innovative Swiss
manufacturing sector, the foundation of Swiss wealth and prosperity38. He is
right about the importance of the manufacturing sector, but the Swatch Group
is hardly an example of an innovative company, considering that its profits
largely derive from its price-setting power and that its expenses for in-house
R&D have decreased roughly by half since he became an executive in the
business of his father in 200339.
A lot of previously trumped up innovations such as the flik-flak (watch for

children), System51 (a Swatch with a mechanical movement), and, more
recently, the Bellamy watch (near-field technology for cash free payments
with a watch) and Swatch Touch Zero One (a smartwatch for beach volleyball
players) were also announced in similar staged media events40. It is certain
that the Swatch Group continues to obtain many patents. The 2015 annual
report points out that Swatch Group achieved a record of 200 patents in
2015 alone. However, their quality and potential commercial value is not
discussed41.
38. Hayek, Nick, 2015, Wird die Schweiz zum Land ohne Industrie? Schweiz am Sonntag, 27.
12. 2015 (available online: http://www.schweizamsonntag.ch/ressort/wirtschaft/wird
_die_schweiz_zum_land_ohne_industrie/).
39. Pilet, François, 2015, La part des revenus que Swatch consacre à la recherche et
développement a baissé de moitié depuis 2003. SOJH, 1.12. 2015 (available online:
http://www.sojh.ch/legacy/?page=a7dd12b1dab17d2&type=create&id=42572).
40. Tissot may have been a pioneer in smartwatch technology with the first T-Touch watch in
1999, featuring a tactile sapphire crystal to access the functions of the movement. Its latest
product, the Tissot T-Touch Expert Solar is however merely a tool watch, made for a very
specific buyer. As paying features become incorporated in ever more capable smartwatches it
is very possible that smartphones could quickly cannibalize simple watches with this feature.
41. Swatch Group, Annual Report, released March 10, 2016.
55
Even though it is too early to judge the commercial fate of the most recent
innovations, the Swatch Group has so far been unable to translate any of the
prior innovations into a commercial success comparable to the Swatch, which
had not been developed by Hayek.
Donzé therefore points out in his book on the history of the watch industry42 that
Swatch Group managed to establish itself as the leading watch company in the
world without introducing a single fundamental innovation in the technical field.
The lack of ability of the Swatch Group to develop and commercialize

groundbreaking innovation appears to be unrelated to external factors, such as
monetary policies or the “bad” car industry. It may, however, have a lot to do
with the corporate culture of the Swatch Group (in the case of the Smart Car),
which is more about brand marketing than innovation. The Swatch Group is
taking advantage of its price-setting power as a private monopoly for numerous
watch components, and its ability to extract large premia from the sale of “Swiss
made” watches. These two main sources of revenues account for the revival of
the Swiss watch industry after the Swatch revolution in the early 1980s under
Ernst Thomke and his team. Swatch Group under the Hayek family may have
built an image of being an innovative company, but this was rather part of its
marketing strategy as will be illustrated in further detail in Chapter 6.3.
Company expenses for research and development (R&D) in fact decreased by

more than half over the past decade (in per centage of the total revenues) as
will be illustrated in further detail in Chapter 6.3.
5.2.5 Regulation and securing ownership

Nick Hayek’s tendency to portray himself as a patriotic industry patron in public
56
may eventually backfire. He successfully lobbied mainly through the FH to push

up the local contents requirements for watches from 50 per cent to 60 per cent
to obtain the “Swiss made” label. Since this measure negatively affects the
competitiveness of the Swiss manufacturing sector as a whole, the new “Swiss
made” requirements are more likely to kill rather than create Swiss-based jobs.
Many long-established Swiss companies have decided to dispense with the
“Swiss made” label entirely in order to maintain the flexibility in production that
allows them to remain innovative and cost-competitive. This also applies to the
Swiss watch industry.
In May 2016, Daniela Aeschlimann-Schneider, daughter of the president of the

Swiss Federal Council, Johann Schneider-Ammann, has been elected to the
governing board of the Swatch Group. She is relatively inexperienced and has
very few mandates beyond the industrial group of her family, the Ammann
Group43. Swatch Group claims that Ms Aeschlimann-Schneider has been
chosen for her wide experience as an independent entrepreneur who knows
about the value of “Swiss made”. When asked whether the fact that she is the
daughter of Johann Schneider Ammann, current president of the Swiss Federal
Council and part of the Swatch Group governing board until 2010, Swatch
Group media desk responded that political links were definitely not part of the
selection criteria44.
Again and again, Nick Hayek, like his father Nicolas Hayek, manages to
portray himself as a political and economic outsider in Switzerland while
ensuring that the most influential political and economic insiders implicitly
43. Ammann Group Holding AG is a member of the Hayek Pool. With this, descendants
of U. Ammann-Schellenberg senior (father of the wife of the current Swiss Federal
Councillor Johann Schneider-Ammann are also involved as beneficial owners. Further,
‘Families Ammann’ (pension funds, foundations and individuals, Madisa AG) are close to
the Hayek Pool but are not part of it (see Swatch Group annual report 2015, p. 146). They
are listed as significant shareholders.
44. Flubacher, Rita, 2016, Familiäre Verhältnisse. Tages-Anzeiger, 8.4.2016.
57
endorse the private monopoly of Swatch Group and expensive “Swissness”

regulation that others find hard to comply with. All this political lobbying is
increasingly eroding Swiss competitiveness in the global watch business since
the early 1990s, when Ernst Thomke decided to leave SMH. The loss of
competitiveness may definitely not be in the public interest but does not seem
to be an issue of concern for the Hayek family, this also includes the youngest
family member in the executive board, Marc Hayek. As the son of the
Chairwoman of the governing board, Nayla Hayek, and grandson of Nicolas
Hayek, he is currently CEO of three Swatch Group luxury brands: Blancpain,
Breguet and Jaquet-Droz. He is also on the governing board of Swatch Group
and widely assumed to become the next Hayek in charge of Swatch Group45.
In a recent interview he reaffirmed his intention to basically follow the strategy
of Nick Hayek. He attributes the current difficulties of the company to external
factors that cannot be influenced by the company46. His remark in an interview
in the Sonntagsblick that Swatch Group would not dismiss anybody for
economic reasons indicates that the Hayek family feels rather immune to the
forces of technological and economic change47.
45. Sulc, Adrian, 2016, Interview mit Marc Hayek, der Bund, 19.3.2016.
46. Ibid.
47. 20 Minuten, 2016, Gesagt: ‚Aus wirtschaftlichen Gründen wird bei uns niemand
entlassen‘. Marc Hayek im Gespräch mit dem „Sonntagsblick”. Wirtschaft, 21. März, 2016:
p. 18.
58
Chapter 6
The position of the Swiss watch
industry in the global market
n the 1990s, the returns and the number of employees of the SMH/Swatch
I Group continuously increased, not least because Nicolas Hayek was able to
keep most of the skilled designers, managers and marketing experts that Ernst
Thomke had recruited earlier. The exploitation of economies of scale in the
production and marketing of the Swatch greatly contributed to the overall
commercial success. Sales increased thanks also to the exploitation of economies
of scope – producing the same product over and over again in different variations.
Economies of scope are “efficiencies wrought by variety, not volume”1. They
make product diversification efficient if they are based on the common and
recurrent use of proprietary know-how or on an indivisible physical asset2.
Nicolas Hayek’s push for vertical integration included also the creation of
Swatch retail shops, which helped to reduce counterfeiting and added to the
effectiveness of the brand campaigns. It made Swatch a cult object with great
emotional value3.
The huge commercial success of the Swatch in the high-volume/low-price

segment was instrumental for the recovery of the Swiss watch industry after the
1. Goldhar, Joel D. and Mariann Jelinek, 1983, Plan for Economies of Scope, Harvard
Business Review.
2. Teece, David J., 1980. Economies of Scope and the Scope of the Enterprise, Journal of
Economic Behavior & Organization 1 (3).
3. Wegelin, J. and B. Leighton, 2010, Mr. Swatch: Nicolas Hayek and the secret of his
success. Free Association 2010.
59
crisis in the early 1980s. Thanks to global advertising campaigns, Swatch gained
great visibility and, with it, paving the way for the revival of many higher-priced
mechanical Swiss watch brands4.
The renewed popularity of expensive mechanical Swiss watches led to a shift

in focus from high volumes in the lower price segment of electronic watches to
low volumes in the high-priced segment of luxury mechanical watches that do
not have a battery but run on a spring5.
As a consequence, the share of the export volume of mechanical watches

increased from less than 10 per cent6 at the start of the 1990s to 28 per cent in
20147. While at the start of the 1990s, mechanical watches accounted for little
over 40 per cent8 of Swiss watch export sales, they generated a record of 79
per cent in 20149, based on the value. Even though the Swiss watch industry is
diversified and present in all of the different price segments, the repositioning in
the high-price segment and the sizeable profits generated with luxury watches
is striking. However, the assumption that rich people will always want expensive
Swiss watches can easily lead to complacency bearing the risk to fall behind
technological developments elsewhere.
4. Credit Suisse Global Research, 2013, Swiss Watch Industry, Prospects and Challenges.
Swiss Issues Industries, October (available online: https://www.credit-suisse.com/media/
production/pb/docs/unternehmen/kmugrossunternehmen/uhrenstudie-en.pdf).
5. Mechanical movements use energy from a wound spring to power the watch. This spring
stores energy and transfers it through a series of gears and springs, regulating the release of
energy to power the watch. To create power in a quartz watch movement, a battery sends an
electrical current through a small quartz crystal, electrifying the crystal to create vibrations.
These vibrations keep the movement oscillating and drive the motor to move the watch hands
(available online: http://www.wixonjewelers.com/education/swiss-watches/watch-movements/).
p. 11.
7. FH, export statistics (available online: http://www.fhs.ch/eng/statistics.html).
p. 11.
9. FH, export statistics (available online: http://www.fhs.ch/eng/statistics.html).
60
The Swiss watch industry in the global market
Box 5 The prestige value of mechanical watches

Even though quartz watches are more accurate than mechanical ones and
require minimal maintenance, aside from battery replacements, mechanical
watches tend to be more expensive. One reason is that the production of
mechanical movements is more complex and costlier. Another is that
mechanical timepieces can be sold at higher price premia because they are
considered prestige objects and status symbols. For most watch fans,
quartz watches are not as desirable because they lack the technical
craftsmanship and engineering that mechanical timepieces have.
Source: http://www.wixonjewelers.com/education/swiss-watches/watch-movements/
6.1 The Swiss watch industry at its peak in 2014

In 2014, the value generated with Swiss watch exports reached an all-time high
of CHF 22.2 billion (Figure 4). Vontobel Bank estimates that worldwide Swiss
watch sales generate 57 per cent of the total global market value of CHF 40
billion for watches. Figure 6 in the Annex shows that three Swiss watch
companies dominate the international watch industry: Swatch Group, Richemont
and Rolex.
The most important export destination for Swiss watches in value terms is Asia
(mainly Hong Kong, China, and Japan) with 53 per cent, followed by Europe
with 31 per cent and the Americas with 14 per cent (mainly United States)10.
In terms of units of wrist watches exported, however, Switzerland lags far

behind China and Hong Kong. Of an estimated 1.2 billion units of wrist watches
produced worldwide in 2014, only 31.2 million units (2.6 per cent of total global
10. Vontobel Bank, 2015, Vontobel Luxury Goods Shop 2015, Zurich. (found in: Uhren von
A bis Z - Montres Le Guide, Herausgeber: Ithaka Time SA, Beilage zu NZZ).
61
production) were manufactured in Switzerland11. China exported 669 million

and Hong Kong 315.1 million time pieces12. While the unit export price of a
Swiss watch amounted to US$ 803 in 2014, a watch of Chinese origin did cost
only US$ 413. Twenty years ago the average export price for a Swiss watch
amounted only to CHF 160 (1992)14. This clearly proves the increased
importance of the low-volume/high price segment for the Swiss watch industry.
It may also be an indication for the price-setting power of Swatch Group. This
largely accounts for the high EBITA15 margins despite the relatively low
productivity in the Swatch Group.
6.2 Export crisis of the Swiss watch industry in 2015

In 2015, Swiss watch exports started to decline. In October 2015, the export
value decreased nominally by 12.3 per cent (CHF 2 billion). This was the biggest
monthly drop in export earnings since 200916. Over the past year, the value of
total watch exports declined by 3.3 per cent to CHF 21.5 billion (Figure 4).
Most relevant was the decline in Hong Kong, which is the most important export
market, with a minus of 38.5 per cent. Exports to the United States contracted
by 12.2 per cent. Exports to China were down by 5.1 per cent17. Wrist watches
in all price segments saw downturns in the number of units as well as in value
terms. For Swatch Group, Hong Kong and China (termed as “Greater China”)
constitute the largest market; 33.9 per cent of its net sales revenues originate
from this region, followed by other Asian countries with 22.3 per cent, Europe
11. FH and Vontobel Bank, 2015, Vontobel Luxury Goods Shop 2015, Zurich (found in: Uhren
von A bis Z - Montres Le Guide, Herausgeber: Ithaka Time SA, Beilage zu NZZ).
12. Ibid.
13. Ibid.
p. 11.
15. EBITDA margin is a measurement of a company's operating profitability as a per centage
of its total revenue.
16. FH export statistics (available online: http://www.fhs.ch/eng/statistics.html).
17. Ibid.
62
accounts for 21.8 per cent, Switzerland for 11.7 per cent, and the Americas for
8.6 per cent. In total, net sales in Asia with 56.2 per cent contribute the most18.
Developments in these markets are therefore crucial for the company.
Swatch Group tends to blame the strong Swiss franc, the economic
slowdown in East Asia, the low oil revenues in Russia and the Middle East,
the terror attacks in Paris and political turmoil in Hong Kong for the decline
in exports. But, not all of these external factors have a significant impact on
revenues. The appreciation of the Swiss franc against the euro or the Russian
ruble is very pronounced, but this is not true for all other currencies. The US
and the Hong Kong dollar, or the Chinese renminbi (yuan) for example,
appreciated again compared to the Swiss franc. In view of the large price
premia that Swiss watches generate as luxury goods on the global market,
the price elasticity tends to be low and consequently the effect of an
appreciating Swiss franc on sales is rather moderate compared to other
industries in which cost-effectiveness is crucial to remain competitive.
Yet, Nick Hayek claims that due the strong Swiss franc, Swatch Group would
have lost CHF 4 billion in net sales over the past six years19. This would be
equivalent to a loss in annual sales of CHF 666 million or about eight per cent
of total net sales in 2015. However, in Europe net sales have been increasing
since 2010, which seems to contradict his reasoning.
Apart from the external factors, there is also endogenous technological change
in the global watch industry and being caught unprepared cannot be attributed
to events that take place outside the industry.
18 Swatch Group, Annual Report 2015, p. 183.

19. Martel, Andrea, 2016, Optimistischer Swatch-Group-Chef Nick Hayek, “Nicht China
ist das Problem, sondern der Franken”, NZZ, 10.03.2016 (available online: http://www.
nzz.ch/wirtschaft/unternehmen/optimistischer-swatch-group-chef-nick-hayek-nicht-
china-ist-das-problem-sondern-der-franken-ld.6898).
63
The Swiss watch industry seems rather ill-prepared to the current challenges
and opportunities related to disruptive new technologies in the market. The
rise of smartwatches, especially the Apple Watch in 2015, may reflect the
beginning of shifting consumer preferences. While sales of Apple Watch soar,
sales of Swiss watches have declined. Yet, Nick Hayek repeatedly told the
media in 2015 that smartwatches would not represent a challenge for the
Swiss watch industry and that he sees no need to seek collaboration with a
company in the Silicon Valley20. And when asked about the decline of the
Swatch share price and the high amount of short selling, he blames
speculators, and sees no internal causes.
In 2016, Swatch Group paid the same high dividend as in 2015 and will start
a share buyback programme of CHF 1.5 billion over three years, designed to
shore up the share price. The company justified this measure by pointing at
its annual cash flow of CHF 1.5–3 billion compared to annual investments of
CHF 500 million21. Share buybacks are per se neither good nor bad. However,
if the main goal of this financial engineering is to reduce equity and thus
improve its profitability – then alarm bells should ring22. The last time when
companies had bought back such large volumes of shares as it is the case
nowadays was in 2007 before the financial crisis. This indicates that the
market is heading towards the end of cycle and that some companies
overstretch the instrument and soon will face financial problems23.
20. Gibbs, Samuel (2015) Swatch CEO: Apple Watch is “interesting toy” that can't last
more than 24 hours. The Guardian, 24.08.2015 (available online: http://www.
theguardian.com/technology/2015/aug/24/swatch-ceo-apple-watch-interesting-toy).
21. Martel, Andrea, 2015, Nick Hayek im Gespräch “Eine Kooperation mit Google oder
Intel kommt nicht infrage”. NZZ am Sonntag, 27.03.2015 (available online:
http://www.nzz. ch/wirtschaft/eine-kooperation-mit-google-oder-intel-kommt-nicht-infrage-
1.18510907).
22. Grundlehner, Werner, 2016, Aktienrückkauf als Warnsignal. NZZ 10. Mai 2016
(available online: http://www.nzz.ch/meinung/kommentare/aktienrueckkauf-die-letzte-idee-
der-manager-ld.18870).
23. Ibid.
64
6.3 Challenges facing the watch industry

6.3.1 The rise of smartwatches and wearables
In the fourth quarter of 2015, 8.1 million smartwatches have been shipped
worldwide, compared to 7.9 million watch units shipped out of Switzerland24.
It amounts to an increase in sales of smartwatches of 316 per cent compared
to the year-ago quarter, and to a decline in sales of Swiss watches of -4.1 per
cent in the same period. Even though Apple (5.1 million Apple Watches sold)
and Samsung (1.3 million smartwatches sold) are the dominant sellers of
smartwatches, many companies outside Switzerland are bent on selling
smartwatches in 2016. Especially the fashion company Fossil which sells
watches in the price segment of Swatch has acquired numerous smartwatch
companies at the end of 2015. Even though many Swiss watch companies are
also tinkering with smartwatches, their share in global smartwatch sales is
small25. TAG Heuer from LVMH may however prosper with its first high-end
smartwatch (price category CHF 1 500), the TAG Heuer Connected. This
smartwatch, made by a Swiss company but without the “Swiss made” label,
was presented at the Baselworld watch fair in March 2016. Jean-Claude Biver,
the former marketing boss of Omega who became CEO of the LVMH’s watch
business, was proud of his collaboration with Android and Intel to develop a
comprehensive smartwatch that can also be used as a mechanical watch. It
seems to become a big commercial success. Within the first four months since
its launch at the end of November 2015 he already sold out the first batch of
20 000 smartwatches. He plans now to scale up production and expects to
reach annual sales in 2017 of more than 200 000. He was unable to meet the
new local content requirements to obtain the “Swiss made” label, but thinks
24. Vanian, Jonathan, 2016 More Smartwatches Were Shipped Worldwide Than Swiss
Watches. Fortune Magazine, February 19, 2016 (available online: http://fortune.com/
2016/02/19/more-smartwatches-shipped-worldwide-swiss-watches/).
25. Strategic Analytics Press Release, February 17, 2016 (available online:
https://www.strategyanalytics.com/strategy-analytics/news/strategy-analytics-press-
releases/strategy-analytics-press-release/2016/02/18/global-smartwatch-shipments-
overtake-swiss-watch-shipments-in-q4-2015#.VzMjjyHUp3h).
65
that “Swiss made” does not matter that much anyway in order to receive a
price premium. After all, TAG Heuer is generally known as a Swiss brand26.
The rapid increase in sales of smartwatches leads to the question whether

the established Swiss players in the watch industry are innovating enough to
keep up with disruptive technologies combining information technology with
watchmaking. The share of revenues invested in R&D decreased from 4 per
cent in 2003 to 2.1 per cent in 2014 (compared to Apple with 3.3 per cent
and Samsung with 6.4 per cent)27. In turn, the marketing expenses of the
Swatch Group stand at a record high of 14 per cent in 201528.
The low spending on R&D also impacts the Swatch Group’s capacity to innovate
on its own. Since the commercial success of the Swatch starting in 1983, no
genuinely new scalable market through innovation has been created. The
Sistem51 watch, the mechanical version of the quartz-based Swatch, developed
by Swatch Group in 2013 could be an innovation with a great potential for
commercial success. Sistem51 consists of a 51-part mechanical movement not
requiring any maintenance. It is the only mechanical watch manufactured,
assembled and finished by automated machines, and sold at a price of only CHF
150. Despite mentioning high growth in sales (“bestselling”) in the last Swatch
half-year report in 201529 the sales volumes of Sistem51 have so far not been
disclosed, also not in the latest annual report. It seems that these sales are far
below the sales volume of the Apple Watch when considering the numbers above.
26. Meisser, P. and Dittli, Mark (2016) Jean-Claude Biver im Gespräch. Finanz und Witschaft,
16.03.2016: 8–9.
27. Pilet, François, 2015, La part des revenus que Swatch consacre à la recherche et
développement a baissé de moitié depuis 2003. SOJH, 1.12. 2015 (available online:
http://www.sojh.ch/legacy/?page=a7dd12b1dab17d2&type=create&id=42572).
28. Martel, Andrea, 2016, Nach einem enttäuschenden Jahresergebnis: die Swatch Group
glaubt sich unterschätzt. NZZ, 3.Februar, 2016 (available online: http://www.nzz.ch/wirtschaft/
unternehmen/swatch-mit-weniger-gewinn-1.18688702:).
29. Swatch Group, 2015, Half-Year Report 2015 (available online:
http://www.swatchgroup.com/en/services/archive/2015/half_year_report_2015).
66
6.3.2 The Apple Watch

The big advantage of the Apple Watch is that it is part of Apple company’s
product ecosystem. In this ecosystem the Apple Watch is essentially a
complementary good to the iPad or the iPhone. It is estimated that 1 billion
people use Apple devices worldwide.
If Apple as well as the Samsung Watches should once be considered essential

extensions of their respective smartphones, then Swatch Group may be caught
as unprepared as Kodak company was in the early 2000s. At that time, Kodak
noticed that digital cameras were becoming an integral part of the mobile phone,
destroying its market for cheap digital snap-shot cameras. The company lacked
the internal competences and distribution channels to make the transition from
a camera producer to a mobile phone producer30.
The Apple Watch could become a game changer and annihilate the hopes
in Sistem51 and other new product developments to revive sales in the lower
price segment.
Swatch Group is trying to counter this risk by developing its own smartwatches
designed for particular purposes. One is the Swatch Touch Zero One, launched
in 2015, a beach volleyball-based fitness tracker that counts steps, distance
and calories. Another is Swatch Bellamy, which recently was launched in China
and will be available in Switzerland, Brazil, and the United States in the course
of 2016. Bellamy includes a chip in an existing Swatch that enables payment
functions through near field communication (NFC) technology. Priced at 600
yuan (about US$ 95), it does not, however, connect to the internet31.
30. Hirstein, Andreas, 2015, Digitalfotographie: “Es war nur eine Spielerei”. NZZ am
Sonntag, 22.11. 2015 (available online: http://www.nzz.ch/nzzas/nzz-am-sonntag/
digitalfotografie-steven-sasson-interview-es-war-nur-eine-spielerei-ld.3183).
31. Nick Hayek Jr. stroke a deal in 2015 with China Union Pay, the former Chinese bank
card monopolist and the Chinese state-owned Bank of Communications.
67
As China has lifted the bank card monopoly in 2015, retailers are expanding
their access to NFC technology and Chinese tech companies are collaborating
with other watchmakers to ensure that they can attract users to their payment
systems. Even though Apple was unable to strike a deal with China Union Pay
earlier, it might do so with another company now. It could augment its Apple
Watch with a credit card payment function.
The fact that a comprehensive smartwatch may offer all the functions and
services of existing specialized wearables helps explain why even the highly
successful company Fitbit specialized in producing fitness-trackers
faces increasing losses at the stock exchange32. The market research firm
Markit found parallels between the first generation iPhone and smartphones
that were equipped with GPS and Google maps functions in 2007 and the
new smartwatches with the integrated fitness trackers. In 2007 these
smartphones rapidly undermined the businesses of Personal Navigation
Device companies such as Tomtom or Garmin33. The business of wearables
with specialized functions could face the same fate with multifunctional
smartwatches.
6.3.3 Inventory problems and short selling

Apart from facing stiff competition from smartwatches – not just from Apple,
but also Samsung and Fossil – Swatch Group seems to face an increasing
gap between production volumes and effectively realized sales. Inventories
of Swatch Group are at an unprecedented level. At the end of December
2015, they amounted to an assessed value of CHF 6 151 million, equivalent
to 46.4 per cent of the company’s total assets34. Until 2006, the latter number
32. Markit, 2015, Bears circle Swatch and Fitbit in battle for wrists, December 2nd 2015
(available online: http://www.markit.com/Commentary/NewsCommentarieFile?CMSID=
2f6d7ca1c32343e78a24f245794bdf64).
33. Ibid.
34. Swatch Group, Annual Report, released March 10, 2016.
68
was always below 30 per cent and it was still below 40 per cent in 2012. Such
high inventories bind a lot of capital, generate high logistics costs, bear risks
of obsolescence and are a clear sign that the company has a problem on
the sales-side. Data from the annual report of 2015 reveals that Swatch
Group has inventories on stock equivalent to the production output of one
full year35.
Another trend is the short selling of Swatch shares which stood at 10.08 per
cent in February of 201536 and has steadily increased to an unprecedented high
level of 29.6 per cent in February of 201637. This means that almost every third
share is now out on loan. Among Swiss shares Swatch Group ranks first among
the top ten short selling titles. Short sellers are betting that smartwatches are
taking market share away from the lower-priced brands of Swatch and that the
share price therefore will further decline38.
6.3.4 Pending lawsuit

In addition, Swatch Group faces a risk of losing a costly lawsuit with the US
jewelry maker Tiffany & Company. It could cost the company an additional CHF
35. This can be calculated as follows from data in the Annual Report 2015: Semi-finished
(CHF 1 970 million) and finished goods (CHF 2’959 million) in inventories (p. 190) amount
together to CHF 4 929 million. This number is compared to the value of production in 2015:
Taking net sales of CHF 8 451 million (p. 10) and subtracting the operating result of CHF 1 451
(p. 10) total costs of CHF 7 000 million result. If one further deducts from this 50 per cent of
personnel expense of CHF 1 194 million (p. 184, as 50 per cent of personnel is employed
abroad) and 50 per cent of total other operating expenses of CHF 1 284 million (p. 184, as 50
per cent of employees are abroad) totaling CHF 2 476 then production costs of CHF 4 524 result.
36. Müller, Dietegen, 2015, Swatch Group ziehen weiter Leerverkäufer an, Finanz und
Wirtschaft, 27.02. 2015 (available online: http://www.fuw.ch/article/swatch-group-ziehen-weiter-
leerverkaufer-an/).
37. Lanz-Carl, Claudia, 2016, Leonteq stehen neu im Fokus der Leerverkäufer, Finanz und
Wirtschaft, 26.02.2016 (available online: http://www.fuw.ch/article/leonteq-stehen-neu-im-
fokus-der-leerverkaufer/).
38. Gertler, Corinne, 2016, Swatch Short Interest Near Record on Smartwatch Threat: Chart,
Bloomberg Business, February 1, 2016 (available online: http://www.bloomberg.com/
news/articles/2016-02-01/swatch-short-interest-near-record-on-smartwatch-threat-chart).
69
402 million39. In 2013, the Swatch Group acquired the Harry Winston luxury
jewelry and watch brand for roughly US$ 1 billion. This was important to
compensate for the failure to cooperate with Tiffany & Company in the jewelry
and luxury watch business. Yet, compared to Richemont, the Swatch Group
has still a small presence in the luxury business outside watches.
Finally, Baselworld 2016 showed that none of the luxury Swiss watch brands
have embraced a modular concept that would allow customers to obtain a
tailor-made version of a luxury watch offered by the particular brand. This seems
odd in view of the trend toward high-value tailor made products in other
consumer good businesses (cars, sailboats, luxury housing, etc).
Instead of responding to new market trends, Swatch Group seems to be more

concerned with maintaining its dominance in the Swiss watchmaking industry
through the elimination of domestic competition.
6.4 Strenghtening “Swissness” rules, the usual corporatist response

Relying on the global popularity of the “Swiss made” label and the premium it
fetches for its emotional and prestige value, Swatch Group together with other
well-known Swiss luxury watch companies in FH lobbied to enhance the local
content requirements initially from the existing 50 per cent to 80 per cent. Finally,
the new “Swiss made” ordinance requires a 60 per cent value criteria that
applies to the watch as a whole and its parts (Box 7 in Chapter 8).
39. Back in 2013 a Dutch arbitration court ended the dispute between Swatch Group and US
jewelry maker Tiffany regarding their failed joint venture to produce and market watches. The
joint venture was intended to give Tiffany much greater access to the luxury watch market.
As the partnership did not result in profitable business for either company, the deal ended in
2011. The arbitration ruling at that time was in favour of Swatch Group that reaped an award
of CHF 402 million from Tiffany. Yet, the company did never communicate to its shareholders
that in the Netherlands it is possible to redraw an arbitration ruling to an ordinary court.
Tiffany took advantage of this possibility. An Amsterdam-based district court scrapped the
arbitration ruling in March 2015. Swatch appealed and a final decision is awaited for fall of
2016. If the decision will be in favour of Tiffany, Swatch Group will have to pay back the CHF
402 million (Tagesanzeiger, 16.03.2015, Millionen-Frage im Streit Swatch gegen Tiffany).
70
Such regulation is often touted by Swiss politicians and members of FH as being

in the public interest. The argumentation is that structural change is inevitable
and the Swiss watch business can only survive in global competition through
strict quality control, consolidation and industrial concentration. It is assumed
that requiring Swiss companies to increase the share of value creation in
Switzerland would result in more domestic jobs for skilled Swiss people. Since
the early 1930s, this has been a recurrent line of argumentation in Swiss
corporatism to justify state intervention to protect the interests of the watch
industry, often to the disadvantage of Swiss consumers, taxpayers and the
competitiveness of the Swiss watch industry.
The new so-called “Swissness” regulation, which is expected to come in force

in 2017, is likely to become a job killer rather than a job creator in Switzerland
because it forces many Swiss companies to dispense from the “Swiss made”
label altogether and move more production abroad40. This will be addressed in
more detail in Chapter 8.
40. Bürgler, Erich, 2016, Die Swissness wird zum Jobkiller. Sonntagszeitung, 3.4.2016.
71
Chapter 7
Market and political power of
the Swatch Group
n the 1970s, the global challenges related to the automation in the production
I of mechanical watches and the quartz revolution made the Swiss government
realize that “Swissness” alone will not save the industry. As a consequence,
the government eased the corporatist grip on the watch industry and this made
it eventually possible for ASUAG to respond with path-breaking innovation.
The corporate response to today’s new competition from smartwatches

comprises regular announcements by the executive board of Swatch Group about
path breaking innovations that will eventually take place, and reassuring words
for the shareholders that the company is in good shape despite the difficulties
that are exclusively attributed to external factors such as the strong Swiss franc
and slow growth in China. The company’s main strategy to counter these adverse
external effects is to further strengthen its corporatist grip on the Swiss watch
industry through its monopoly power and tougher “Swiss made” rules.
Via the Federation of the Swiss Watch Industry (FH), Swatch Group was
successful in its efforts to tighten “Swiss made” rules for watches that is likely
to undermine the position of globally integrated, cost-effective and innovative
smaller Swiss watch companies. In other words, the company relies on its
market and political power as well as its exclusive distribution channels to
ensure its high-margin sales (Figure 10 in Annex).
7.1 Market power of Swatch Group

The dominant position of the Swatch Group in the Swiss watch industry has
72
Market and political power of the Swatch Group
been reviewed by the Swiss Federal Competition Commission (WEKO) in 20131.

Figure 10 in the Annex shows the presence of the Swatch Group in the different
segments of the value chain.
7.1.1 Swatch Group market power in production and distribution2

Swatch Group accounts for a volume-based market share of 60–65 per cent
in the low- to mid-end watch segment, dominated by quartz watches, and
50–60 per cent in the segment of mechanical watches up to a price range of
CHF 2 000–3 000. Above this price range, the market share of Swatch Group
is estimated to be 10–20 per cent. In terms of the total number of mechanical
watches sold, Swatch Group is the leader among Swiss companies, with a
market share of more than 30 per cent.
Swatch Group has its own retail stores. This rather costly sales strategy
allows for a more effective price policy. Grey markets can be reduced and a
better capitalization of the brand is possible. A more recent strategy to bring
Swatch Group’s brands closer to wealthy consumers in Switzerland, is to
acquire large areas in Swiss luxury resorts, expensive shopping streets, and
airports in Switzerland. Securing exclusive marketing rights in such spots
also ensures less exposure of wealthy Swiss and foreign tourists to luxury
shops and watch brands that do not belong to Swatch3. In addition, Swatch
1. The Swatch Group dominates the low-end (quartz) watch segment with the Swatch selling
high volumes but at moderate margins. The Swatch accounts according to Vontobel bank
for 9 per cent of the company’s sales. In the mid-end segment the brand Tissot accounts for
13 per cent of Swatch Group’s sales. The low to mid-end watch segments together make up
for roughly 25 per cent of the company’s sales. In the mid-price range one can assume that
in order to produce a competitively priced watch, the company has to rely also on foreign
materials and production stages that are performed abroad, such as in China. In the price
range above CHF 2 000–3 000, Richemont and Rolex each have higher market shares of
20–30 per cent than Swatch Group. Among luxury brands Swatch is facing competition
since the other groups also have very strong brands.
2. Wettbewerbskommission, 2013, Verfügung der Wettbewerbskommission vom
21.10.2013 in Sachen Swatch Group Lieferstopp. p. 63–65.
73
Group has a lot of bargaining power with respect to independent retailers

since it has watches in each price segment and offers after sales services4.
Their products are thus found in almost all watch stores.
The Swatch Group has primarily inherited its market dominance from SSIH in
the field of finished watches and from ASUAG in the field of movements and
assortments. Nicolas Hayek who had been appointed on top of the watch
business by the Swiss establishment in banking and finance, and later acquired
majority stakes in SMH through clever financial engineering, thus essentially
converted a former state monopoly (ASUAG) into an even more powerful private
monopoly with the tacit approval of the Swiss government.
7.1.2 Monopoly of Swatch Group in different markets of the watch industry

ETA Company, which became competitive under ASUAG, was the largest
manufacturer of movements and continues to do so under the Swatch Group
today. Apart from producing these movements for the finished watch brands
that belong to Swatch Group, it sells them also to the rest of the industry. Rolex
3. Ruh, Boas. 2016. Luxuriöses Einkaufen auf dem Bürgerstock. NZZ 25.02.2016 (available
online: http://www.nzz.ch/schweiz/swatch-nistet-sich-auf-dem-buergenstock-ein-1.18701191).
4. The lower the price of a watch, the more sales points are required: Tissot has 13 500 sales
points, Longines has 4 000 and Omega 1 800. For service points the same logic holds; the
higher the price the lesser the number of service centres. Longines has 1 000 service points,
while Omega has 450, and Breguet 45 (Geoff Gannon, Swatch’s Moat, available online:
http://gannonandhoangoninvesting.com/blog/2015/5/19/swatchs-moat). The Swatch Group
also has a strong presence in the internet. Online sales channels according to the Deloitte
watch study 2015 continue to grow. 38 per cent of respondents consider that e-boutique will
be the most important sales channel, up from 21 per cent in 2014. This can help to reduce
the attraction of grey markets. Product counterfeiting is still a problem. But in the high price
segment online, sales have been weak as high prices are an obstacle. Social media has
become the most important channel for marketing and bloggers are now an integral part of
the communication environment. This is especially advantageous for independent brands
with limited marketing budgets. However, when it comes to product placement and brand
ambassadors they are mostly used by large brands that can afford them. (Source:
http://www2.deloitte.com/content/dam/Deloitte/ch/ Documents/consumer-business/ch-en-
consumer-business-deloitte-swiss-watch-study-2015.pdf)
74
is one of the few exceptions that produces its own movements as well, but does
not sell outside of the company.
In the market for mechanical movements accessible to third-party customers,

the Swiss Federal Competition Commission (WEKO) estimates ETA company
to account for a market share of 80–90 per cent (annual production volume:
5 million), followed by movements from Sellita 10–20 per cent, and from Soprod
and others each 0–5 per cent5. Recently, the Swiss company Ronda announced
that it will again produce mechanical movements. A production volume of
100 000 is planned for 2016, in addition to its quartz movements production6.
ETA production capacities and the variety of mechanical movements available
remain, however, unmatched by any other company in Switzerland. ETA is
producing and distributing mechanical and quartz movements as well as the
Swatch watch7.
The market share of the Swatch Group-owned company Nivarox in the

production and sale of assortments, the heart of the watch movement8, is even
more dominant. The company’s dominant market power for assortments that
5. Wettbewerbskommission, 2013, Verfügung der Wettbewerbskommission vom

21.10.2013 in Sachen Swatch Group Liefertstopp. p. 35.
6. Schuppli, Stefan, 2016, Ein Paukenschlag: Ronda produziert wieder mechanische
Uhrwerke. Basel landschaftliche Zeitung, 18.03.2016.
7. To make the production of watch movements economically viable, mass production is
required as the initial cost of installation and machinery is very large. The higher the
volume of production, the lower the unit cost price per movement. Know-how per se is
not an entry barrier as many patents especially for the production of mechanical (ETA)
movements have expired. ETA Company is producing them already for several decades.
It is not a fast paced market subject to recurring fundamental changes due to innovation.
8. The assortment is the regulating organ of a mechanical watch movement. The
accuracy of the watch depends on it. The assortment encompasses the escape wheel,
balance wheel, hairspring, anchor lever, pallet stones, and associated bridges. These are
typically mounted together on a bridge and can be sourced separately from the
“ébauche” (movement blank). The accuracy of the watch depends on the assortments;
the hairspring, for example, is what makes the balance wheel oscillate, and it is that
constant rhythm that ensures the precision of the watch.
75
are sold to third-party customers also enhances its market power for
movements, since smaller competitors in this market, such as Sellita, depend
on the supply of assortments from Nivarox as well.
WEKO noticed already back in 2006 that Nivarox had a dominant market share
in assortments. For 2010, it estimated Nivarox’s market share to be 90–100 per
cent. It thus has a (quasi)-monopoly on assortments that is also related to the
outstanding quality and the high-volume production at competitive prices9.
Through its 100 per cent ownership of Nivarox, the Swatch Group can ensure
that non-vertically integrated independent watch companies, some of which
are also members of FH do not oppose its proposed policy position papers.
Rolex is one of the few companies making its own assortments, but they are
only in few cases direct competitors of Swatch Group and share many common
interests in the market for low-volume, high-value Swiss watches.
Speaking de-facto on behalf of FH makes the Swatch Group’s lobbying for

favourable regulatory outcomes quite effective since politicians can hardly
distinguish between industry-wide interests and the special interests of the
Swatch Group. This may also explain why no policy maker has ever looked
critically at the decision of the Swatch Group to suspend the supply of spare
parts of their brands to any independent watch repair shop inside and outside
of Switzerland by 2016. Even though the company assures to be merely
concerned with the enforcement of quality standards and thus the protection
of the reputation of its brands, it is clear that the main goal is to appropriate the
profits generated in the field of post-sale quality and repair services. The welfare
loss for customers is, however, potentially significant since tailor-made watch
repair will be more difficult. Moreover, thousands of independent watch repairers
in Europe may feel compelled to accept the expensive terms set by the watch
9. Wettbewerbskommission, 2013, Verfügung der Wettbewerbskommission vom 21.10.2013

in Sachen Swatch Group Liefertstopp. p. 49.
76
companies to obtain replacement parts (training courses, certificates etc)10. The

European Commission determined in July 2014 that there is little evidence that
Swatch Group AG and other luxury watch makers had thwarted competition by
refusing to supply spare parts to independent repair shops and closed its
investigation. However, the European Confederation of Watch & Clock
Repairers’ Associations (CEAHR) appealed against the Commission’s decision
on 12 January 201511, also in view of Swatch Group’s announcement to stop
selling spare parts to independent watch repairers on 31 December 2015.
7.1.3 WEKO’s decision regarding Swatch Group’s market power

In 2002, ETA announced that it would no more be willing to supply the Swiss
watch industry with movements blanks, also called “ébauches”. This marked the
end of the implicit mandate of ETA to supply the watch industry with movements,
as it existed since the 1930s when ASUAG was founded with the support of the
Swiss government. Obviously, the Swatch Group is not a state but a private
monopoly and could therefore make such an announcement. The argument was
that Swatch Group would have difficulties to supply its own watch companies
with sufficient movements, that producing movements is not as difficult and
capital intensive as it used to be, and that Swiss watch companies need to be
weaned off from their passive reliance on movement blanks from ETA. The initial
plan was to stop delivering movement blanks by 2006 and instead only sell
completely assembled movements. WEKO and Swatch Group reached a mutual
agreement in 200412. It pointed out that ETA was the only supplier of mechanical
movement blanks for prices below CHF 300 and that 75 per cent of Swiss
mechanical movements contain movement blanks from ETA. Considering a
market share for movement blanks of 95 per cent at that time, WEKO concluded
10. Lancaster, Ambrose, 2015, Watchmakers protest, CEAHR vs. Swatch Group. Time
transformed, July 3, 2015.
11. Available online: http://roschier.com/sites/default/files/newsletters/ac3d420a9ed9dc
720961092e0c32ffac.html#article2
12. WEKO, 19.11.2004, Press release (available online: http://www.news.admin.ch/
NSBSubscriber/message/attachments/14462.pdf).
77
that a phase out time of three years was too short of an adjustment period for
the Swiss watch companies that relied on movement blanks from ETA. The
deadline was therefore extended to 2010. At that time the Swatch Group
management decided to continue its policy to gradually phase out the supply of
complete movements and assortments to its competitors13. Depending on the
demand for Swiss watches, this often led to shortages of available Swiss
movements among Swiss watch companies that did not belong to Swatch
Group and were unable to produce their own movements. In 2009, WEKO looked
again at the dominant market position of ETA and whether it discriminates
independent watch companies compared to intra-group companies14. The
investigation was interrupted in 2011, when WEKO started to inspect Swatch
Group as a whole. After all, its dominant market position is not just limited to
movement blanks but also assortments (Nivarox) and watch hands (Universo)15.
In October 2013, WEKO announced that it did not find sufficient evidence for
discriminatory behaviour by ETA and therefore decided to let ETA’s supply
obligation for mechanical movements expire on December 31, 201916. WEKOs
demand for the stepwise reduction is criticized by Law Professor Marc Amstutz
as an inadmissible form of market engineering (Box 6).
In July of 2014, WEKO closed also its investigations regarding ETA’s pricing
policy for mechanical movements that was in place since 200917. The leniency
14. WEKO, 15.09.2009, Press release (available online: https://www.news.admin.ch/
message/index.html?lang=de&msg-id=29027).
15. Steffen, Charlotte, 2012, How Firms Profit from Acting in Networked Environments: Realising
Competitive Advantages in Business Clusters. Rainer Hampp Verlag, München und Mering.
16. WEKO, 2013, Verfügung der Wettbewerbskommission vom 21.10.2013 in Sachen Swatch
Group Liefertstopp (available online: https://www.news.admin.ch/message/index. html?lang
=de&msg-id=50702).
17. WEKO, 31.07.2014, Press release (available online: https://www.news.admin.ch/
message/index.html?lang=de&msg-id=53879).
78
with which WEKO treated Swatch Group is striking in view of the fact that it
abandoned the original policy of ASUAG to supply Swiss watch companies with
movements and assortments on equal terms. In order to ensure that no price
discrimination or supply restrictions take place, WEKO should ask Swatch
Group to become more transparent by publishing the prices of the pieces
produced in each segment.
The company Sellita may be seen as an emerging competitor that produces

alternatives to ETA movements. Yet, Sellita still depends to a considerable extent
on ETA calibres that are subsequently reassembled and resold. Moreover,
dependence on the supply of Nivarox assortments is still higher18.
The Swatch Group intends to start negotiations with WEKO by mid-2016 about
the stepwise reduction of deliveries of assortments from Nivarox to third-party
customers. The goal is to find an agreement with WEKO by mid-201819. So far
there is no single manufacturer in sight in Switzerland that could provide
assortments of sufficiently high quality and quantity at comparable costs to the
ones provided by Nivarox.
In view of the growing uncertainty about the supply of watch parts provided by
the Swatch Group, the Swiss watch company TAG Heuer signed an agreement
with the Japanese company SEIKO in 2012 to at least secure the springs for its
watches and thus became less dependent on Nivarox20.
But securing parts from abroad may also become a problem in view of the
Swatch Group’s successful lobbying efforts to increase the local content
18. Maillard, Serge. 2016. Mechanical – who will succeed ETA? (available online: http://www.
europastar.com/watch-knowledge/1004087450-mechanical-who-will-succeed-eta.html).
19. WEKO, 2013, Verfügung der Wettbewerbskommission vom 21.10.2013 in Sachen Swatch
Group Liefertstopp. p. 117–118.
79
requirements stipulated in the more stringent “Swiss made” regulation planned

to come into force by 2017.
The decisions by WEKO have to be seen in light of the existing Swiss Cartel
Act (Anti-trust law). This Act aims to prevent economically or socially damaging
effects of cartels and other restrictions of competition, and thus to promote
competition in the interests of a free market economy. Even though the Act
proved rather ineffective in enforcing merger control to prevent detrimental
effects to the Swiss economy21, promoting more competition does not seem to
be at the forefront of Swiss politics. The revision of the Cartel Act fell through in
Parliament in 2014. The permissive nature of the Cartel Act stands in strong
contrast to the EU anti-trust legislation which uses the so-called SIEC-Test
(Significant Impediment to Effective Competition).
It is not very likely that the “moat” around Swatch Group – as Geoff Gannon22
calls it – will be curtailed in the near future. The “moat” refers to market-
entry barriers that market-dominating companies try to establish in order to
maintain pricing power and the monopoly rents. The moat of Swatch Group
is particularly pronounced in the market for mechanical movements,
assortments, and watches in the mid-priced segment, which is described in
this chapter. A recent article in the economist highlights how such moats result
in consumer welfare losses, less innovation due to decreased competition
through new market-entries, increased spending of the incumbent companies
on unproductive lobbying in order to shape regulations in their favour, and so
on. The bottom line is that “a new commitment to competition could be the
source of optimism […]. After all, it is only a healthy dollop of greed and a
21. Botschaft zur Änderung des Kartellgesetzes und zum Bundesgesetz über die
Organisation der Wettbewerbsbehörde vom 22. Februar 2012 (available online:
https://www.admin.ch/ opc/de/federal-gazette/2012/3905.pdf).
22. Gannon, Geoff, 2015.Swatch's Moat, May 19 (available online: http://
gannonandhoangoninvesting.com/blog/2015/5/19/swatchs-moat).
80
Box 6 WEKO’s decision from 20.10.2013 in light of the Cartel Act

According to professor Marc Amstutz from the University of Fribourg,
the provisions of the Cartel Act suggest that the monopolist (of
movements) can be obliged to continue to deliver third-party-customers
as long as the company is dominating the market. This has been the
practice of WEKO in the past. WEKO’s decision regarding Swatch
Group/ETA is, however, relying on market engineering with the goal to
foster the entry of new suppliers of assortments and movements.
According to professor Amstutz, such centrally planned market

engineering measures do not comply with the law: first, WEKO has no
authority to prescribe structural measures for an entire industry. It only
can do so for individual companies (e.g. unbundling).
Second, the mutual agreement between Swatch Group and WEKO boils
down to an exemption regulation that is not provided for in the Cartel Act.
Through the phase-out process Swatch Group can gradually withdraw from
its supplier obligations. This right is meant to put pressure on alternative
movement producers to be ready by 2020 but there is no evidence that
Swatch Group/ETA might lose its dominant market position by then.
Third, the assumption that there will be an established alternative

supplier that is able to meet the demand for movements outside the
Swatch Group is rather unrealistic. Marc Amstutz concludes that WEKO
willingly accepts that the Swatch Group is allowed to fundamentally alter
the structure of the watch industry in a way that may strengthen rather
than weaken its dominant market position.
Source: NZZ, 13.03.2013, Unzulässiger Eingriff der Wettbewerbsbehörden,
Gastkommentar zum Weko-Uhrwerkestreit von Marc Amstutz, Professor für
Wirtschafsrecht.
81
belief in a better future that prompts people to start from scratch and try to
cross the moat that has been dug around corporate America”23. This also
holds for the Swiss case. To spur innovation and revitalize the Swiss watch
industry such that it can keep up its market share also in numbers of
timepieces, not more regulation is necessary but more competition from
entrepreneurial outsiders challenging the rather complacent insiders.
23. The Economist. 2016. Too much of a good thing. Profits are too high. America needs
a giant dose of competition, March 26 (available online: http://www.economist.com/
news/briefing/21695385-profits-are-too-high-america-needs-giant-dose-competition-
too-much-good-thing).
82
Chapter 8
The revision of the
“Swiss made” regulation
8.1 The revision of the “Swiss made” regulation for watches

Based on the new “Swissness” bill1 that was passed in parliament in 2013, the
Swiss Federal Council approved the revised “Swiss made” regulation for
watches in September 2015. It is scheduled to enter into force on 1 January
2017. The “Swissness” bill defines new minimal requirements for industrial
goods required for the use of the “Swiss made” label, which also applies to
watches. At least 60 per cent of the manufacturing costs of the product must
occur in Switzerland, whereby research and development costs may also be
included in the calculation. In addition, at least one essential manufacturing step
must have taken place in Switzerland2.
The revised “Swissness” regulation for watches will be much stricter than the
prior “Swiss made” regulation for watches from 1971 (see Chapter 3.1 and Box
2). Increasing the requirements to earn the “Swiss made” label for watches is
justified as a stronger kind of collective guarantee for what consumers expect
from watches that are being manufactured in Switzerland. It is argued that
enhancing the required share of local content would ensure domestic investment
in new buildings, extensions and refurbishments of the watch industry.
1. According to the Swiss Federal Institute of Intellectual Property (IPE) the objective was
“to create a basis for effectively safeguarding and preserving the added value of the
‘Swiss label – the ‘spearhead’ in the advertisement of Swiss products and services – for
the long-term future”.
2. Swiss Federal Institute of Intellectual Property. 2015. The new “Swissness” legislation
(available online: https://www.ige.ch/en/indications-of-source/swissness.html).
83
The “Swiss made” label is extremely attractive for luxury watches and has been
a magnet for foreign direct investment. According to studies, the label provides
for impressive price premia of up to 50 per cent for mechanical watches3. It is
a marketing tool that boosts the bona fides of watches, arguing that the term
goes hand in hand with quality, expertise and innovation.
Luxury brand producers have thus been strongly in favour of raising regulatory
bars designed to fend off counterfeiting and to reap even higher premia. Yet, it
is not obvious why Swiss content beyond the already existing requirement of
50 per cent would be more effective in fighting counterfeiting, why it should
automatically translate into better timepieces, and why it is the “Swiss made”
label rather than the Swiss brand itself that fetches the high premium.
A few small and mid-sized Swiss watch companies under the lead of Mondaine
have created the organization “IG Swiss Made” to fight the 60 per cent value
criteria. They point at the cost implications of the new regulation for companies
that produce watches in the low- to mid-price range. The requirements for
obtaining the “Swiss made” label are indeed costly and complex and likely to
increase concentration in the watch industry (Box 7).
Recently, FH did not object to a watering down of the “Swissness” criteria. In

order to ensure that companies will be supplied sufficiently with components
Swatch Group and FH lobby for an exception clause. Different components
such as dials, hands, or watch cases shall be excluded for two years from the
“Swiss made” calculation. Swiss manufacturers who have invested in this area
are concerned because they are currently facing overproduction in view of lower
sales of Swiss watches. Ronnie Bernheim, CEO of the independent Swiss watch
3. Swiss Federal Institute of Intellectual Property. “Swissness” Legislative Amendment:

background, goal and content (available online: https://www.ipi.ch/fileadmin/
user_upload/Juristische_Infos/e/Swissness_Legislative_Amendment-Content.pdf).
84
The revision of the “Swiss made” regulation
Box 7 The complex and costly new “Swiss made” label for watches
Several criteria have to be fulfilled to win the “Swiss made” label. The new
core requirement is that 60 per cent of the manufacturing costs of the watch
have to accrue within Switzerland. This includes R&D, treatment of raw
materials, assembly, as well as quality assurance and certification. Not
included are expenses for batteries as well as services such as packaging,
distribution, or marketing. The 60 per cent value criteria for “Swissness”
does not only apply to the movement (as it was the case in the 1971
“Swissness” law with its 50 per cent criteria), but to every component of
the watch (including dials and cases).
Newly included in the “Swiss made” criteria are the mechanical

construction and the prototyping of the movement as well as the
conception of the software or the display, if carried out in Switzerland. The
new regulation extends also the definition of what a watch is: a time
measuring device worn on the wrist. This would also include smartwatches.
Source: Institut für Geistiges Eigentum IGE, 2015, Revision der Verordnung über die
Benützung des Schweizer Namens für Uhren, Dokumente zur Vernehmlassung 2015
(available online: https://www.ige.ch/de/herkunftsangaben/swissness/
branchenverordnungen/swiss-made-verordnung-fuer-uhren/vernehmlassung-2015.html).
company Mondaine agrees that there is currently no scarcity of “Swiss made”

components, but he would still be unable to obtain the desired quality. The
exception clause would therefore be necessary4. The quality problems
combined with the lower demand are having an impact on the unemployment
rate in the watch industry. Unemployment has been persistently increasing after
2012 and reaches 9 per cent, the second highest after the restaurant sector
4. Vonplon, David, 2016, Verkehrte Welt. Jahrelang hat die Uhrenindustrie für scharfe
Regeln gekämpft. Jetzt lässt sie Verwässerung zu. Handelszeitung, 4. Mai 2016.
85
(Figure 13 in the Annex). This points to a structural problem in the industry that
is very different from the unemployment peak during the financial crisis 2009/10.
8.2 The role of the Federation of the Swiss Watch Industry (FH) in the
design of new “Swiss made” regulation for watches
FH played a crucial role in the definition of the “Swissness” criteria for
watches. In September 2015, the Swiss Federal Council followed the
recommendation of FH and approved the more strict and complex “Swiss
made” regulation for watches. The strong lobbying of FH was never
considered to be an issue of concern since the organization was thought to
represent the watch industry as a whole. Yet, the influence of the Swatch
Group within FH is striking. Thanks to its monopoly in the supply of watch
parts, it is essentially able to force watch companies that represent the
innovative low to mid-range price segment, as members of FH, to endorse
the interests of the members that represent the high price segment for
watches, which mainly relies on the high premia for “Swiss made” (Box 8).
“IG Swiss made” wrote a letter to the Swiss Federal Institute of Intellectual
Property Rights (IGE) pointing out that FH does not represent the entire Swiss
watch industry but merely the luxury segment5. Since FH was able to define
what “Swissness” means for watches in terms of local content requirements,
it is clearly biased towards the preferences of the luxury segment and
may undermine the competitive position of innovative watch companies that
could possibly challenge the ETA monopoly position in movements and
assortments if they are able to produce more cost-effective, which will be
difficult in view of the enhanced local content requirements. The letter further
points out that the new 60 per cent local content requirement is contrary to
Swiss legal practice as well as opposed to the numerous international trade
agreements that Switzerland has signed and ratified since the 1970s. Alas,
5. Available online: https://www.ige.ch/fileadmin/user_upload/Juristische_Infos/

swissness_vl/10802046.pdf
86
Box 8 The position of the Swatch Group within FH

The balance of powers in FH is clear: As of 2014, there are six members of
the Swatch Group in the Board of FH. In addition to these six votes of the
Swatch Group, Richemont, Rolex, and Patek Philippe have together six
votes. They represent the luxury segment that is highly in favour of
“Swissness”. The remaining watch companies or suppliers hold seven
votes in the Board. The Board then submits issues to all 59 members at
the General Assembly of FH for approval. The General Assembly is again
dominated by Swatch Group with a total of 13 votes, more than any other
company. Swatch, Rolex and the other high-end brands have together 32
votes compared to 27 votes that represent the remaining companies.
Source: FH, Annual Report 2014, pp. 40–42.
the group was unable to influence Swiss policy makers, who associate Swiss
watches with either the Swatch or the luxury segment.
8.3 Impacts of the new “Swiss made” regulation for watches

The proposed “Swiss made” regulation for watches increases local content
requirements enormously, including far-reaching prescriptions that undermine
economic freedom and entrepreneurship. This is especially troubling for
manufacturers in the middle price segment such as Mondaine but also for
the producers of quartz watches in the lower price segments where
international competition is fierce and production costs matter a great deal.
Companies in the lower and middle price segments are much more integrated
into global value chains than producers of mechanical watches. They must
take advantage of the international division of labour and invest in innovation
to remain competitive. The proposed “Swiss made” regulation would not only
negatively affect them but also watch companies abroad – especially foreign
manufacturers of parts, especially in Europe and Asia. Figure 5 (see Annex)
87
shows that imports of watches and parts thereof have been growing steadily
and amounted to over CHF 3.8 billion in 2015. This is equivalent to 18 per
cent of the Swiss watch export value for the same year.
China is the largest producer of watches and its parts on a global scale. As
Switzerland heavily imports watch parts from China, Switzerland could
potentially come under fire also from that side. In the bilateral free trade
agreement between Switzerland and China that came into force in 2014, the
rules of origin allow for a maximum of 40 per cent of foreign precursor
materials6. This is the precondition from a customs point of view to win the
Swiss origin in order to enjoy reduced tariffs at the stage of import into China.
However, the “Swiss made” rules in the new “Swiss made” regulation for
watches that will come into force in 2017 are stricter. It needs to be seen how
the Chinese will react once Swiss watch companies will reduce sourcing
watch parts from China due to the regulatory changes favouring companies
in Switzerland over foreign suppliers.
The revised “Swiss made” regulation shows incompatibilities with the bilateral
Swiss-EU watch agreement and also with Article III GATT (national treatment)
as it is conditional upon priority use of domestic products over imports,
designed to protect geographical indication. This could potentially lead to
trade disputes.
The Swiss federal government claims that the proposed regulation is in

accordance with WTO law because the “Swiss made” label is voluntary. That
6. According to Annex II, clocks and watches meet the condition of substantial
transformation if their “Value of Non-Originating Material” does not exceed 40 per cent,
i.e. if the value of components not originating from Switzerland or China, respectively,
does not exceed 40 per cent of the total ex-works price of the watch (“VMN 40%”).
Source: A Practical Guide to the New Free-Trade Agreement between Switzerland and
China (available online: http://www.wenfei.com/fileadmin/pdfs/
China_Publications/Wenfei_FTA_Publication_December_2013.pdf).
88
may be true if it would be a private standard created by FH, but it is actually

based on government regulation and thus de-facto binding for all Swiss
watch companies who do not want to risk their “Swiss made” premia. The
new local content requirements for obtaining the “Swiss made” label must
therefore be considered non-tariff barriers from a trade policy perspective.
Consequently, it may be contrary to the principle of national treatment (Article
III GATT) which is asking for equal treatment of domestic and imported
materials7.
7. Aerni, Philipp, 2015, Stellungnahme zur Revision der Verordnung über die Benützung
des Schweizer Namens für Uhren. Brief vom 2. Dezember 2015 an das Schweizerische
Institut für Geistiges Eigentum, Bern.
89
Chapter 9
The Swatch Group:
high on reputation,
low on corporate governance
ompared to other listed Swiss multinationals, the Swatch Group does
C not release much information on production, prices and sales. Its

lack of transparency is reflected in corporate social responsibility
ratings. In the CSRHUB ratings1 for corporate governance, the company
reaches a score of 44 out of 100 and has the lowest rating among the watch
companies listed at the stock exchange.
9.1 Corporate governance problems

From a corporate governance standpoint Swatch Group shows several
deficiencies. For one, the Hayek Pool as the majority shareholder does not
only control the governing board but at the same time also occupies the
CEO position. This constellation allows only for a limited supervision of the
executive management. This is also reflected by the fact that the company
does not have an organization chart depicting who is responsible for what.
Transparency does not seem to be what the Swatch Group is aiming for. At
the general assembly, voting is still done by raising hands. This is criticized
because then no voting results are available and the company does not know
the share of no-votes. Regarding the latter, shareholder counselors advocate
1. Available online: www.csrhub.com
90
High on reputation, low on corporate governance
that even a share of 15 per cent no-votes would have resulted in changes –
for example in the compensation policies in other companies2.
As of the end of 2015 the Hayek Pool controls 40.1 per cent and Esther Grether’s
group 5.9 per cent of the votes (together 46 per cent of votes). For the Hayek
Pool as the majority shareholder it suffices to hold only 22.6 per cent of the
share capital. This in fact makes Swatch Group attractive for a company
takeover as an investor would have to take over a fraction of the share capital
to control the entire company. In the case of Sika company the Burkard family
controls 52.4 per cent of the votes with only 16.1 per cent of the share capital.
This is why Saint-Gobain is ready to pay a much higher price for the family
shares than what they are actually worth at the stock exchange (the other
shareholders would not profit from the offer)3. However, the offer by Saint-
Gobain is only possible because the statutes of Sika contain an opting-out
clause. The general rule is that when a transferee surpasses 33 1/3 per cent of
the voting rights – according to articles 32 and 52 the Swiss Federal Stock
Exchanges and Securities Trading Act4 – a mandatory takeover offer has to be
made to all shareholders. With the opting-out clause such a mandatory takeover
offer is not required even though the threshold level of 33 1/3 per cent of voting
rights is surpassed. This is what makes it possible that a buyer can get in control
of a listed company without having to consider the non-majority shareholders.
Internationally, this is a unique provision.
Swatch Group has in its statutes not an opting-out but an opting-up clause.
The latter allows that a transferee does not have to make a mandatory takeover
2. Möckli, Andreas, 2016, Das lange Sündenregister der Swatch Group, Tagesanzeiger,
27.05.2015 (available online: http://www.tagesanzeiger.ch/wirtschaft/unternehmen-und-
konjunktur/Das-lange-Suendenregister-der-Swatch-Group/story/21197688).
3. AWP, 2014, Sika will an Investorenpräsentation informieren, Finanz und Wirtschaft,
17.12.2014 (available online: http://www.fuw.ch/article/sika-erlautert-lage-an-
investorenprasentation/).
4. Schweizer Bundesgesetz über die Börsen und den Effektenhandel (BEHG, SR 954.1).
91
offer to all shareholders when surpassing the 33 1/3 per cent voting rights but
needs to do so only at a higher threshold level (maximum 49 per cent). In the
case of the Swatch Group this may make it possible for a transferee to buy up
to 49 per cent of voting rights without having to make a takeover offer to all
shareholders. As the Hayek Pool and Mrs Grether together possess 46 per cent
of the votes they may easily pass over their voting rights to a buyer who could
take control of the company with only a fraction of the shareholder capital (about
25 per cent) without having to make an offer to minority shareholders.
An additional reason for the low Corporate Governance ratings is related to the
company’s decision in 2013 to switch from the International Financial Reporting
Standards (IFRS) back to the Swiss GAAP FER as the first company listed on
the SMI. Swiss GAAP FER has been primarily designed for small and medium
sized enterprises (SMEs) involved primarily in domestic business in Switzerland
while IFRS is generally recommended for multinational corporations listed at
the stock exchange.
Deloitte analyzed the financial statements of the seven companies which

switched in 2013 from IFRS to Swiss GAAP FER5. Deloitte finds that on
average the length of consolidated financial statements were reduced by 22
per cent. This has to do with the fact that Swiss GAAP FER rules encompass
about 200 pages while IFRS has 2000. Further, reported total equity declined
after the restatement in Swiss GAAP FER, in the case of Swatch Group it was
8.3 per cent.
9.2 What Swatch and Volkswagen may have in common

Despite poor transparency and low corporate governance scores Swatch Group
has an excellent reputation rating. In the GfK Business Reflector monitoring of
5. Available online: http://www2.deloitte.com/content/dam/Deloitte/ch/Documents/

consumerbusiness/ch-en-consumer-business-deloitte-swiss-watch-study-2015.pdf
92
High on reputation, low on corporate governance
the reputation of Swiss companies, Swatch Group was in first place in 2011
and 2013, in second place in 2012 and 20146. Only in 2015 its rating dropped
to third place.
It indicates that the company still enjoys enormous public trust. Swiss watches
may be considered as part of Swiss identity and criticizing how the company is
run may be confused with an attack against the quality of Swiss watches.
Something similar can be observed in the case of Volkswagen, a national

champion and object of pride in Germany. The cheating of the company during
laboratory emissions testing of its diesel cars was discovered in the United
States while, in Germany, it was a sort of a well-known secret that could not be
disclosed for fear to appear unpatriotic (meaning being against Volkswagen).
The scandal clearly reflected the amount of self-complacency that large
companies with a high reputation and strong ties to their respective
governments had developed over time in a corporatist system7. Despite the
environmental scandal and the obvious corporate governance problem,
Volkswagen remains popular in Germany8.
What Volkswagen and Swatch Group seem to have in common is what

sociologist Diane Vaughan coined “the normalization of deviance” 9. It refers to
a corporate behaviour that clearly goes against the self-proclaimed values and
6. Tagesanzeiger, 2015, Die 20 beliebtesten Firmen der Schweiz, 01.04.2015 (available

online: http://www.tagesanzeiger.ch/wirtschaft/Die-20-beliebtesten-Firmen-der-
Schweiz/story/15758179).
7. Der Spiegel, 2015, Manipulierte Abgasanlagen: VW soll schon vor Jahren gewarnt
worden sein. 26.09.2015 (available online: http://www.spiegel.de/wirtschaft/
unternehmen/vw-wusste-in-abgas-affaere-schon-frueh-bescheid-a-1054926.html).
8. Gibbs, Alexandra, 2015, Volkswagen’s brand value still high with Germans: Survey.
CNBC, 20.10.2015 (available online: http://www.cnbc.com/2015/10/20/volkswagens-
brand-value-still-high-with-german-consumers-survey.html).
9. Vaughan, D., 1996, The Challenger launch decision : risky technology, culture, and
deviance at NASA. Chicago: University of Chicago Press.
93
norms. This behaviour eventually becomes routine and converts into an

unquestioned “script”. It allows managers and engineers of the company to
carry on as if nothing was wrong10. It illustrates how a growing corporate
bureaucracy induces its employees to live with double standards. They may be
aware of the gap between the claims and the reality of the company, but they
do not allow it to come close to them. As such, the corporation can conceal
wrongdoing not only from the public but from itself11. These kind of corporate
governance failures may be especially difficult to detect if a company is popular
and strongly embedded in a corporatist system that is publicly accepted.
10. Useem, Jerry, 2016, What Was Volkswagen Thinking? On the origins of corporate
evil—and idiocy. The Atlantic Monthly Jan/Feb 2016 (available online:
http://www.theatlantic.com/magazine/archive/2016/01/what-was-volkswagen-
thinking/419127/).
11. Aerni, Philipp, K.-J. Gürn, and Irina Kummert, (eds), 2015, Schwierigkeiten mit der
Moral. Springer Gabler.
94
Chapter 10
Conclusions
he invention of the Swatch was decisive for the rebirth of the Swiss watch
T industry in the 1980s after its deepest crisis in history. The path-breaking
product and process innovations associated with the development,
production and marketing of the Swatch made it a great commercial success
and enabled the Swiss watch industry to regain global visibility.
Swatch was a product that run counter to what the Swiss would understand as
a Swiss watch in the 1970s, it was not a mechanical watch and it was not
expensive. In fact, it was a fashionable plastic watch. In this sense, it did not
represent the conservative culture of traditional Swiss craftsmanship in
watchmaking but proved to the world that the Swiss watch industry also stands
for the power of innovation.
The success of the Swatch also proved that Swiss innovation in one watch
segment may also help increase sales in another segment that is still primarily
based on traditional craftsmanship. After all, the omnipresence of the Swatch
across the world was crucial for the revival of the (expensive) mechanical Swiss
brands in the 1990s.
In this paper, we showed that the emergence of Swiss corporatism in the watch
industry after World War I undermined rather than enhanced the ability of the
watch industry to effectively respond to new global economic and technological
challenges through innovation in technology and management. The stake-
holders involved in corporatist decision making were mainly concerned with the
preservation of jobs, and the support and protection of domestic watch
95
production. The foundation of ASUAG in the 1930s as a state monopoly in

charge of the production of watch movements and assortments was a first
significant step towards corporatism in the Swiss watch industry. State
intervention was justified by the public interest to keep watch production in
Switzerland. The public mandate of ASUAG was to ensure that domestic watch
companies have access to quality input products at affordable prices.
After World War II, laws were passed with the purpose of reopening the Swiss
economy to foreign competition. The watch industry was, however, able to
protect its interests through the so-called Watch statute in 1951, which was
revised in 1961 and eventually abolished in 1971. In that period, ASUAG gained
a dominant market position not just in the production of movements and
assortments but also the production and export of mechanical watches. ASUAG
and the other large Swiss watch company SSIH that sold famous finished
watches of brands such as Omega and Tissot dominated the market for
premium watches in the world.
Yet, the reliance on the “Swissness” premium also led to complacency. Even
though Swiss engineers made many important contributions to the development
of quartz and digital watches and created the first prototype of a quartz watch,
it was the Japanese that created the first automated assembly lines for
mechanical watches and successfully commercialized the quartz technology,
which took over pin-pallet escapement technology of mechanical watches in
market share at the end of the 1970s.
Apart from the strong appreciation of the Swiss franc after the collapse of the
Bretton Woods system in 1971, foreign competition was the main reason for
the decline in global market share of Swiss watches, which eventually ended
in the watch crisis in 1981, when the global market was flooded with cheap
quartz watches. Yet, the Swiss government realized back then that the crisis
cannot be merely resolved through more regulation. Even though it did take
96
Conclusions
an effort to protect the value of the Swiss brand by means of a first “Swiss
made” regulation in 1971 for watches alone, requiring 50 per cent local
content, the government decided to gradually withdraw from ASUAG, so that
the company could become more entrepreneurial and innovative. The
withdrawal of the state ran in parallel with the rising influence of the Swiss
banks who became the main creditors of the watch industry, eventually
converting debt into equity.
The great leap of innovation in the watch industry happened at the end of the
1970s under the leadership of Ernst Thomke and his team of managers,
designers, marketing experts and engineers. Ernst Thomke, who was then in
charge of ETA, the ASUAG-owned company that produced the mechanical
watch movements, pushed for the development of automated assembly lines,
not just for mechanical but also for quartz movements. Moreover, he shared the
belief with Pierre Renggli, the then president of ASUAG, that an inexpensive
Swiss watch that is based on a quartz movement has the potential to establish
Swiss dominance in watch production not just in the higher but also the lower-
middle price segment of the world market.
So when the watch crisis hit Switzerland in 1981, ASUAG may have suffered
some short-term losses, but it was well prepared to assume market
leadership in the production of movements, assortments as well as finished
watches. In turn, the other large Swiss company, SSIH, that owned brands
such as Omega and Tissot, continued to produce losses despite attempts
by the Union Bank of Switzerland, UBS, to restructure it with the help of
Hayek Engineering AG. The merger of SSIH and ASUAG was therefore a
merger of unequals pushed by a consortium of Swiss banks that owned the
majority of shares in both companies and had the primary interest to save
SSIH. They knew that the bankruptcy of SSIH would also endanger the
existence of many upstream companies that supplied SSIH and which were
also indebted to the banks. Through financial engineering that would probably
97
be considered illicit by today’s standards, they were able to convince the

public that not just SSIH but also ASUAG would go bankrupt unless they are
saved by the Swiss banks. They made their case by presenting an audit done
by the “Schweizerische Treuhand Gesellschaft” that was owned 100 per cent
by the Swiss Bank Corporation. The audit approved of the miraculous
conversion of over CHF 590 million equity capital, as prepared for the tax
statement of ASUAG in 1981, into a negative equity amount of CHF 22.5
million. In the subsequent merger, the value of the new shares held by
minority shareholders of ASUAG shrunk to a tenth of the prior value, while
the value of the shares of SSIH basically remained the same.
When Nicolas G. Hayek and a pool of other investors in 1985 bought a stake in
the company from the Swiss banks, Hayek must have known that ASUAG was
not in a dire state but actually a goldmine. After all, he himself published a report
shortly before the merger. The report stated that ASUAG has a great potential
to reassuming leadership in the global watch market in view of the successful
restructuring under Ernst Thomke and his team1. With the Hayek pool of
investors gaining private ownership of the company resulting from the merger,
a state monopoly essentially fell into private hands and the consequences for
the industry as a whole are felt to date.
The company was first called SMH, and later renamed “Swatch Group”. The
Swatch Group took advantage of its dominant market position by announcing
in 2002 that it would end of the original mandate of its subsidiary, ETA, to supply
the watch industry with movements by 2006. Even though the Swiss Federal
Competition Commission (WEKO) called for appropriate adjustment periods, it
accepted the basic strategy of the company. By 2020, the Swatch Group will
no more be obliged to sell mechanical movements to other Swiss watch
1. Asuag-SSIH (1983) An die Aktionäre: Bericht des Verwaltungsrates gemäss Art.

650/630 des Obligationenrechtes. Asuag-SSIH, Schweizerische Uhrenindustrie, Biel.
98
Conclusions
companies. WEKO assumes that by then, ETA will have lost its monopoly due
to new competitors in the market. The current trends point in another direction,
and it is questionable whether alternative suppliers will be able to meet the
demand for mechanical movements by Swiss watch companies that do not
belong to Swatch Group.
The new “Swiss made” regulation is scheduled to come into force in 2017. It
requires not 50 per cent local content, as stated in the 1971 “Swiss made”
ordinance and as generally accepted in Swiss legal practice as well as
international trade agreements, signed and ratified by Switzerland, but actually
60 per cent. It was basically the FH that defined “Swiss made” for watches. The
Swatch Group has a dominant position in FH, which primarily represents the
interests of the watch companies in the high-end price segment as well as the
producers of movements and assortments. They do not represent the more
innovative companies in the lower and middle range price segments that
depend on the external supply of movements and assortments.
In this sense, the new “Swiss made” ordinance is in the best tradition of Swiss
corporatism in the watch industry. It was approved by policy makers because
it would not just serve the watch industry but also the public interest. Swiss
identity must be preserved and, with it, Swiss jobs in the watch industry. Fact
is, however, that the ordinance was primarily designed to protect the incumbents
at the expense of more innovative outsiders.
Somehow, the corporatist structure allowed for the transition of ASUAG from
a state monopoly into an even more powerful private monopoly called the
Swatch Group. But rather than a deal between employers and employees,
for which corporatism is known and appreciated in the German-speaking
countries of Europe, the deal primarily served the interests of the powerful
stakeholders in Swiss finance and politics. It was done behind closed doors
and involved complex financial engineering. The lack of transparency has
99
permeated into the corporate culture of the Swatch Group. Corporate

governance ratings of the Swatch Group have been persistently low, while
its public reputation remains high. This is not surprising considering the
positive emotional value of the Swatch in public. The fact that the brand
“Swatch” may even be conceived as part of Swiss national identity, makes it
plausible to portray the protection of the private interests of the Swatch Group
as protecting the public interest.
It is however questionable whether the new Swatch Group-induced “Swiss

made” regulation is in the public interest since it further strengthens the
monopoly power of the Swatch Group and endangers the survival of
independent innovative Swiss timepiece makers.
The revised “Swiss made” regulation for watches is likely to accentuate the
concept of sourcing at home and selling to the world at large, denying the
advantages of global value chain integration. The new rules also disregard
the fact that collaboration in R&D even among competing companies from
different parts of the world can be very fruitful. This might be especially critical
in the age of smartwatches where watchmaking is combined with IT.
This new type of corporatism creates non-tariff trade barriers (“Swiss made”
regulation that goes beyond what has been agreed upon in international trade
agreements) in the name of the public interest (keeping Swiss jobs at home). It
may be a recipe for the next crisis, especially in view of the economic slowdown
in China, and the rise of smartwatches as the disruptive new technology in the
watch industry in 2015.
Swatch Group looks ill-prepared for the looming smartwatch revolution

despite its strong market position and some efforts to make better use of
information technology. Nick Hayek publicly announced that he would not
seek collaboration with one of the giants in information and communication
100
Conclusions
technologies, since Swiss watches would not serve the same market like
smartwatches. He argued that smartwatches are actually a hype that would
eventually pass, ignoring the fact that the watch might indeed once become
a complementary good of the smartphone2.
When the share price of the Swatch Group declined substantially in 2015, Nick
Hayek followed the tradition of his father by blaming external factors for the
problems such as the strong Swiss franc and weak demand in important export
markets. Yet, the losses in share value of the Swatch Group may have been
more related to the fact that 8.1 million smartwatches have been shipped in
the last quarter of 2015 alone, compared to 7.9 million watch units shipped out
of Switzerland3. The other two multinational conglomerates in the luxury and
watch business, Richemont and LVMH, were equally exposed to the same
external factors but face less competition pressure from the smartwatch, which
mainly hits the low/mid range watch price segment. In addition, these two
conglomerates also seemed to enjoy more confidence with shareholders in
view of the less pronounced declines in stock value, in the case of Richemont,
and a fairly stable share price in the case of LVMH. The two conglomerates are
also less targeted by short-sellers. The good performance of LVMH may also
be related to the Swiss watch company TAG Heuter, owned by LVMH, that has
reported a record high demand for its smartwatch in the range of CHF 1 500.
Nick Hayek still seems to be in denial about the growing worldwide shift in
consumer preferences toward smartwatches and has announced a long-term
2. Martel, Andrea, 2016, Nach einem enttäuschenden Jahresergebnis: die Swatch Group
glaubt sich underschätzt. NZZ, 3.Februar, 2016 (available online:
http://www.nzz.ch/wirtschaft/unternehmen/swatch-mit-weniger-gewinn-1.18688702).
3. Mawston, Neil, 2016, Global Smartwatch Shipments Overtake Swiss Watch Shipments
in Q4 2015, Strategy Analytic Press releases, Feb. 18, 2016 (available online:
https://www.strategyanalytics.com/strategy-analytics/news/strategy-analytics-press-
releases/strategy-analytics-press-release/2016/02/18/global-smartwatch-shipments-
overtake-swiss-watch-shipments-in-q4-2015#.Vt2KLEbQBKV).
101
share buy back programme in February 2016 to shore up the share price, which
he considers to be attacked by speculators that do not value the strengths of
the Swatch Group4.
As the low-end mass production segment is extremely important for the

visibility of the innovative capacity of the Swatch Group and the Swiss watch
industry as a whole, an innovation breakthrough crowned with commercial
success is needed. Otherwise, the high-price segment of mechanical watches
where high premia are generated, could also suffer. It is a misconception that
the Swiss watch industry could survive in future by merely relying on the
premia for handcrafted expensive watches that might be full of incremental
innovations but devoid of any effort to involve the customer to a higher extent
by offering more customized products through a more modular approach to
watchmaking.
Despite the rhetoric by Hayek Sr., and later by Hayek Jr., of challenging the
Swiss establishment with groundbreaking and visionary innovation, there is not
yet much to show for. The Smart Car was probably never meant to be
commercialized by SMH in the 1990; and the latest announcement by Nick
Hayek to make his father’s dream come true by building environmentally friendly
car batteries in Switzerland that would generate thousands of jobs and billions
of revenues in the near future, faces some skepticism in view of the fact that
the battery only exists so far as a prototype coin battery.
When Nicolas Hayek died in 2010, his alleged achievement of saving the
Swiss watch industry was praised in the obituaries in Forbes magazine, the
New York Times, the Guardian and many other global national daily and
4. Meisser, Pascal, 2016, Swatch Group setzt sich ambitionierte Ziele, Finanz und
Wirtschaft, 05.02.2016 (available online: http://www.fuw.ch/article/swatch-group-setzt-
sich-ambitionierte-ziele/).
102
Conclusions
weekly magazines. They portrayed him as an outsider that launched the

Swatch, the greatest innovation in the recent history of the watch business,
against strong resistance and skepticism from the corporate establishment.
As “Mr Swatch”, he was characterized as an “eccentric showman, blithely
wearing eight of his products simultaneously, four on each arm”5. With these
gestures he demonstrated the emotional relationship the Swatch has to his
owner. The message was that the product is a mere extension of oneself. “It
was not for you, it is actually you”, as the sociologist Sherry Turkle explained
the relationship between humans and their personal computers6. His
marketing strategy was somehow focused on the generation of such personal
emotions for the personal product worn at one’s arm wrist. This also helps
explain how the popularity of the Swatch brand was also transferred to its
supposed creator, Nicolas Hayek.
In this sense, obituaries for Nicolas Hayek are somewhat comparable to the
ones for Steve Jobs, who died on October 5, 2011. True, global mourning for
Steve Jobs reached another dimension because Apple products were not just
nice gadgets to wear but were actually shaping the content and even the
meaning of people’s lives.
But there are many similarities: both, Hayek and Jobs, were strongly focused
on ruthlessly taking advantage of their market power and were known to be
arrogant and vain. Moreover, both infused the story they told about themselves
with the product they were selling. They did so by staging theatrical events
announcing the next big thing and portraying it as a moral cause to support it.
5. Pope, Stephen, 2010, Swatch Billionaire Nicolas Hayek, Who Saved The Swiss Watch
Industry, Dies. Forbes Magazine, 29.06.2010 (available online: http://www.forbes.com/
sites/billions/2010/06/29/swatch-billionaire-nicolas-hayek-who-saved-the-swiss-watch-
industry-dies/#461d33fa4427).
6. Turkle, Sherry, 2005, The Second Self: Computers and the Human Spirit. Twentieth
Anniversary Edition, MIT Press).
103
They wanted to make consumers believe that to buy their goods also meant to
do good7.
Yet, there are four major differences: (1) While both were consummate
showmen, the theatrical media events of Steve Jobs were designed to launch
real innovative products that proved to be scalable, while Hayek’s events were
primarily announcing the development of new products that, in most cases,
never reached the stage of successful commercialization; (2) Steve Jobs
and his colleagues were building up a business from scratch while Nicolas
Hayek merely inherited a former state monopoly that he later converted into
a private monopoly; (3) Steve Jobs was actually an outsider while Nicolas
Hayek was brought into the watch business by the establishment; (4) despite
all his flaws and recklessness, Steve Jobs was the genius and innovative
entrepreneur who helped to transform the personal computer business into
an ecosystem of fashionable electronic consumer goods that communicate
with each other. In the watch industry, it was not Nicolas Hayek who
revolutionized the watch business with the development and successful
commercialization of the Swatch, but Ernst Thomke and his team. Even when
it came to the successful marketing of “affordable luxury” in the late 1990s
and early 2000, it was Jean-Claude Biver, the “nostalgia salesman”, who
restored Blancpain in the 1980s, and helped making Omega the flagship
watch of the Swatch Group in the upper price segment in 2000. Thanks to
those two brilliant entrepreneurs and their teams, the Swatch Group managed
to establish itself as the leading watch company in the world in the 1990s even
without introducing a single fundamental innovation in the technical field since
the launch of the Swatch8.
7. Halpern, Sue, 2016, The Real Legacy of Steve Jobs. The New York Review of Books,
Feburary 11, 2016 (available online: http://www.nybooks.com/articles/2016/02/11/the-real-
legacy-of-steve-jobs/).
104
Conclusions
Yet, this dominant position might not last forever in view of the current economic
and technological challenges in the global watch industry. The Swatch Group
continues to rely on extracting monopoly rents and its marketing strategy is still
based on the “affordable luxury” concept of the 1990s. As for the company’s
answer to the coming information technology revolution in the watch business,
it responds lukewarm with some gadgets here and there that are hardly scalable
in future. The Swiss watch industry of today is much less prepared to face the
challenges related to disruptive technologies than was the case in the 1980s
when the industry had invested in microelectronics and had built the first quartz
wristwatches9.
The Hayek family does not seem to worry because its members have reason to
believe that Swiss corporatism will protect their business, allegedly in the “public
interest”. The revised “Swiss made” regulation for watches approved by the
Swiss Federal Council in fall 2015, and the WEKO decision in 2013 to allow the
Swatch Group to stop selling mechanical movements to Swiss watch companies
that do not belong to the Swatch Group, are strong indications that there is no
interest to challenge the private monopoly of the Swatch Group and the resulting
corporate governance problems. Swiss corporatism may have been praised in
the past for its consensus-oriented approach in economic policy, but the
dominance of the Swatch Group in the Swiss watch industry also reveals its
shortcomings. Unlike in the 1970s when Swiss corporatism was still able to
respond to the crisis by gradually abolishing the state monopoly, there is less
willingness today to challenge the current private monopoly of the Swatch Group.
This makes it not very likely that the Swiss watch industry will be once again able
to renew itself through innovative leadership, as it happened in the 1970s.
105
ANNEX OF FIGURES
Figure 1 Share of Swiss watch production in global output of finished

watches and movement blanks, 1949–1982
450 90
400 80
350 70
300 60
Million pieces
% share
250 50
200 40
150 30
100 20
50 10
0 0
1949 1954 1964 1974 1975 1976 1977 1978 1979 1980 1981 1982
World production Swiss production Swiss share of

(estimate) (estimate) global production
million pieces million pieces %
Source: FH in: BBl 1983 III 945. Botschaft über die Veräusserung der Beteiligung des
Bundes am Aktienkapital der Allgemeinen Schweizerischen Uhrenindustrie AG vom 14.
September 1983.
106
Annex of figures
Figure 2 Number of workers and manufacturers in the Swiss

watch industry
100 2 500
90
80 2 000
Number of manufacturers
Number of workers ’000
70
60 1 500
50
40 1 000
30
20 500
10
0 0
1949 1954 1960 1965 1974 1976 1978 1980 1982 1990 2000 2010 2014
Number of workers Number of

including home workers manufacturers
Sources: FH in: BBl 1983 III 945. Botschaft über die Veräusserung der Beteiligung des
September 1983; and Convention patronale (available online: http://www.cpih.ch/fichiers
/files/politique-patronale/Recensement%202014_FR_vmedia_def.pdf).
107
Figure 3 Exports of Swiss finished watches and movement blanks,

number of pieces and value, 1944–1982
60 3.0
50 2.5
40 2.0
Million pieces
CHF billion
30 1.5
20 1.0
10 0.5
0 0
1944 1949 1954 1964 1974 1975 1976 1977 1978 1979 1980 1981 1982
Finished Movement Finished Movement

watches blanks watches value blanks value
million pieces million pieces CHF billion CHF billion
Source: FH in: BBl 1983 III 945. Botschaft über die Veräusserung der Beteiligung des
September 1983.
108
Annex of figures
Figure 4 Exports of Swiss clocks and watches and parts, 1988–2015

(as reported in HS Chapter 91)
25 25
20
15 20
10
CHF billion
5 15
% change
-5 10
-10
-15 5
-20
-25 0
1990 1990 2000 2005 2010 2015
Change in export value Export value

+/-% CHF billion
Source: Swissimpex, Oberzolldirektion, Berne.
109
Figure 5 Imports of clocks and watches and parts by Switzerland,

1988–2015 (as reported in HS Chapter 91)
40 4.0
30 3.5
20 3.0
CHF billion
10 2.5
% change
0 2.0
-10 1.5
-20 1.0
-30 0.5
1990 1995 2000 2005 2010 2015
Change in import value Import value

+/-% CHF billion
Source: Swissimpex, Oberzolldirektion, Berne.
110
Annex of figures
Figure 6 Leading companies in the watch market, 2014
Audemars Piguet 1.8

Casio 2.6
Patek Philippe 3.2
Seiko 3.6
Citizen 4.1
LVMH 4.3
Fossil 6.3
Rolex 12.0
Richemont 16.3
Swatch Group 19.2
Others 27.5
0 5 10 15 20 25 30
Market share %
Source: Vontobel Bank, 2015, Vontobel Luxury Goods Shop 2015, Zurich (found in: Uhren
von A bis Z - Montres Le Guide, Herausgeber: Ithaka Time SA, Beilage zu NZZ).
111
Figure 7 Development of inventories, Swatch Group, 1999–2015
14 70
12 60
10 50
% of assets
8 40
CHF billion
6 30
4 20
2 10
0 0
1999 2001 2003 2005 2007 2009 2012 2013 2015
Inventories Total assets Inventories

CHF billion CHF billion % of total assets
Source: Annual Reports of Swatch Group.
112
Annex of figures
Figure 8 Organization of ASUAG, 1982
Board of Directors
Steering Committee
Corporate management
M. Brüesch
H. Sommer C.M. Meyer M. Vendel R. Anker
President
R&D /
Finances Administration
Diversification
Industrial
Movement Watch Finished components /
blanks / components products: equipment /
electronic watches and measuring
movements movements devices / services
Ébauches SA Les Fabriques General Watch ASU

(ESA) d’Assortiments Co. Ltd. (GWC) Composants SA
Réunis • Certina (ASU Industries
ETA Gruppe SA (FAR) • Diantus Inc. & Lasag AG)
• ETA SA • Dynasty
• FHF Nivarox AG • Edox FTS-Frequency
• EEM (NIV) • Endura and Time
• Durowe • Eterna Systems, Inc.
• SEFEA Pierres • Longines
Holding SA • Microma Oscilloquartz
EB, Ébauches • Mido SA
Bettlach AG • Oris
• Rado Sinterwerke
A. Michel AG • Roamer Grenchen AG
Technica AG • Rotary
S. Lambert AG • Technos Statek Corp.
A. Raymond SA
• Arsa
• Damas
• Hoga
Atlantic SA
Source: ASUAG, 1982, Annual Report.
113
Figure 9 Swatch Group net sales and profits, 1983–2012
9 50
8
40
7
Gross sales CHF billion
30
6
Net profit %
5 20
4 10
3
0
2
-10
1
0 -20
1985 1990 1995 2000 2005 2010
Gross sales CHF billion Net profit %
Source: Swatch Group Annual Reports (found in: http://www.ablogtowatch.com/a-brief-

history-of-eta/2/).
114
Annex of figures
Figure 10 Companies of the Swatch Group
Mechanical Watch Finished Electronic Corporate Distribution

and electronic components watches components
movements and jewellery and systems
and assembly
ETA Nivarox-FAR Prestige and EM Micro- Swatch Tourbillon

SA luxury range electronics- Group R&D • Breguet
NOVI SA • Breguet Marin Ltd. • Asulab • Blancpain
ETA • Harry • Moebius • Glashütte
The Swatch Winston Renata • CDNP Original
Group Ltd. Meco SA • Blancpain Batteries • Jaquet
• Glashütte ICB Droz
Francois • Original Microcrystal Ingénieurs • Omega
Golay SA • Jaquet Droz Ltd. Conseils en • Harry
• Léon Hatot Brevets SA Winston
Comadur Ltd. • Omega Swiss Timing
Ltd. Swatch Hour
Rubattel et High range Group Quality Passion
Weyermann • Longines Management
SA • Rado Online stores
• Union Swatch • Longines
MOM le • Glashütte Group • Rado
Prélet SA Services • Tissot
Middle range • Logistics • Balmain
Universo SA • Tissot Division • Hamilton
• Balmain • European • Swatch
Manufacture • Certina Distribution • Flik Flak
Ruedin SA • Mido Centre EDC
• Hamilton Division Worldwide
Lascor SPA • Calvin Klein • IT Services distrubution
watches and Division • Europe
Simon et jewellery • Corporate • Americas
Membrez SA Customer • Middle East
Basic range Service and Africa
• Swatch Division • Far East
• Flik Flak • Real Estate and
Develop- Oceania
Jewellery ment
• Dress Your
Body Ltd Swatch
Group
Immeubles
SA
Source: Swatch Group 2016 (available online: http://www.swatchgroup.com/

en/brands_and_companies/production.
115
Figure 11 ASUAG in numbers, 1973–1982
22 2 200
20 2 000
18 1 800
16 1 600
14 499
14 1 400
1 413
11 494
1 200
Employees ’000
12
CHF million
1 143
10 1 000
801
8 800
798
647 600
6
4 400
321
2 200
0 0
-22.5
-200
1973 1974 1975 1976 1977 1978 1979 1980 1981 1982
Employees Consolidated Consolidated Current Borrowed
’000 sales equity assets funds
CHF million CHF million CHF million CHF million
Source: ASUAG, 1983, Geschäftsbericht 1982. Swiss Economic Archive Basel. p. 6.

Note: Consolidated equity 1973 to 1981 according to carrying amount, 1982 according to
internal values. Consolidated sales, equity and current assets per 31 December.
116
Annex of figures
Figure 12 SSIH in numbers, 1971–1982
8 800
7 340
732.5
7 700
6 600
540.8
5 468.9 500
CHF million
Employees ’000
4 400
3 864
3 300
2 200
1 100
51.3
0 0
-25.1
-100
1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982
Employees Consolidated Consolidated Current Borrowed
’000 sales equity assets funds
CHF million CHF million CHF million CHF million
Source: SSIH, Geschäftsberichte 1980–1981 und 1982/1983. Zentrale für

Wirtschaftsdokumentation, Universität Zürich.
117
Figure 13 Unemployment rate in the Swiss watch industry, 2008–2016
14
12
10
% unemployment
0
Jan Jan Jan Jan Jan Jan Jan Jan Jan
2008 2009 2010 2011 2012 2013 2014 2015 2016
Source: SECO, 2008–2016, Die Lage auf dem Arbeitsmarkt (available online:
https://www.seco.admin.ch/seco/de/home/Arbeit/Arbeitslosenversicherung/arbeitslosenz
ahlen.html).
118
Entrepreneurial Rights as Human Rights
When corporatism leads to

corporate governance failure
Corporatism is often seen as the way Swiss stakeholders in business and

politics handle industrial challenges in a reasonable and flexible way. The
following publication argues, however, that the emergence of corporatist
structures in the Swiss watch industry has often encouraged rent-seeking
and collusion at the expense of the creation of new markets through
innovation. This legacy makes it currently difficult for the industry to
effectively respond to new technological challenges and changing
societal preferences in the global watch business.
The report draws on archival sources, accessible since 2015, that were
also extensively discussed in the Swiss print media in early 2016. They
provide increasing evidence of corporate governance failure in the 1983
merger of SSIH (Société suisse pour l’industrie horlogère) and ASUAG
(Allgemeine Schweizerische Uhrenindustrie AG) that led to today’s Swatch
Group. The merger, induced by Swiss banks, was portrayed as a necessary
step to save the two allegedly bankrupt watch companies. Yet, the archival
sources show that ASUAG had already been successfully restructured and
was ready to conquer global markets with its new product, the Swatch.
Dr Isabelle Schluep Campo and Dr Philipp Aerni, Center for Corporate

Responsibility and Sustainability (CCRS) at the University of Zurich,
Zähringerstrasse 24, 8001 Zurich, Switzerland.
Banson, Cambridge, UK
122 CHF 22.50 / £ 15.00
View publication stats

Swisswatches ISPA

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Swisswatches ISPA

Uploaded by

Copyright:

Available Formats

See discussions, stats, and author profiles for this publication at: https://www.researchgate.

Book · June 2016

Philipp Aerni Isabelle Schluep Campo

SEE PROFILE SEE PROFILE

The user has requested enhancement of the downloaded file.

The case of the

Isabelle Schluep Campo

The case of the

Isabelle Schluep Campo

When corporatism leads to corporate governance failure

Dr Isabelle Schluep Campo, Head of Sustainable Impact, Center for

Dr Philipp Aerni, Director of the Center for Corporate Responsibility

© Isabelle Schluep Campo and Philipp Aerni 2016

Citation: Schluep Campo, I. and Aerni, P. 2016. When corporatism leads to

Available online: www.ourplanet.com

Published by Banson, Cambridge, UK.

Printed in the UK by Cambridge Printers

4. The crisis of the Swiss watch industry in the 1970s 27

5. A merger of unequals: SSIH and ASUAG become SMH 37

The Swiss watch industry

6. The position of the Swiss watch industry in the global market 59

7. Market and political power of Swatch Group 72

8. The revision of the “Swiss made” regulation 83

9. The Swatch Group: high on reputation, low on

ANNEX OF FIGURES 106

orporatism is often seen as the way Swiss stakeholders in business

C and politics handle industrial challenges in a reasonable and flexible

We would like to thank Amy K. Glasmeier, professor of Economic Geography

This study has not received any external funding.

Zurich, June 9, 2016,

Acronyms and abbreviations

ASUAG Allgemeine Schweizerische Uhrenindustrie Aktiengesellschaft /

The Swiss watch industry

SSIH Société suisse pour l’industrie horlogère / Swiss Watch Industry

The Swiss watch industry

widely recognized as the innovation leader in watch manufacturing and

Understanding the history of corporatism in the Swiss watch industry is also

5. Schaible, Franz, 2015, “Swissness benachteiligt Konsumenten”. Interview mit Ronnie

The Swiss watch industry

In order to suppress the practice of “chablonnage” and to preserve the

The Swiss watch industry

later called the Fédération de l'Industrie horlogère suisse) in 1924; Firms

2.1 The Foundation of ASUAG

down the non-performing assets of ASUAG and an interest-free loan of

The strategy of consolidation was insofar promising as it partly eliminated

The Swiss watch industry

survive as subsidiaries and suppliers of SSIH and ASUAG. However, the

2.2 The 1951 “Watch Statute”

Box 1 Economic articles in the Swiss constitution

The Swiss watch industry

The production volume of time pieces and movement blanks in Switzerland

Early steps of trade liberalization also induced the Swiss government to

The “Watch Statute” of 1961 introduced a transitional regime designed to

B and its consequences for the Swiss watch industry, we need to

Katzenstein defines “democratic corporatism” in Switzerland, Germany and

The Swiss watch industry

agenda – often at the expense of the consensus-oriented pre-parliamentary

3.1 Corporatism embodied in the “Swiss made” label for watches

The Swiss watch industry

international sales and marketing of Swiss watches were expected to have

According to Katzenstein11, the new regulation therefore “[…] worked to the

The Swiss watch industry

I of the Bretton Woods System1 in 1971 led to a strong appreciation of the